REG - TBC Bank Group PLC - Half-year Report

TBC BankAnnouncement

20/08/2018 07:10

RNS Number : 2606Y
TBC Bank Group PLC
20 August 2018
 


 
 
TBC BANK GROUP PLC ("TBC Bank")
2Q AND 1H 2018 UNAUDITED CONSOLIDATED FINANCIAL RESULTS
 


 
Forward-Looking Statements
 
This document contains forward-looking statements; such forward-looking statements contain known and unknown risks, uncertainties and other important factors, which may cause the actual results, performance or achievements of TBC Bank Group PLC ("the Bank" or the "Group") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on numerous assumptions regarding the Bank's present and future business strategies and the environment in which the Bank will operate in the future. Important factors that, in the view of the Bank, could cause actual results to differ materially from those discussed in the forward-looking statements include, among others, the achievement of anticipated levels of profitability, growth, cost and recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Georgian economic, political and legal environment, financial risk management and the impact of general business and global economic conditions.
 
None of the future projections, expectations, estimates or prospects in this document should be taken as forecasts or promises nor should they be taken as implying any indication, assurance or guarantee that the assumptions on which such future projections, expectations, estimates or prospects are based are accurate or exhaustive or, in the case of the assumptions, entirely covered in the document. These forward-looking statements speak only as of the date they are made, and subject to compliance with applicable law and regulation the Bank expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in the document to reflect actual results, changes in assumptions or changes in factors affecting those statements.
 
Certain financial information contained in this presentation, which is prepared on the basis of the Group's accounting policies applied consistently from year to year, has been extracted from the Group's unaudited management's accounts and financial statements. The areas in which the management's accounts might differ from the International Financial Reporting Standards and/or U.S. generally accepted accounting principles could be significant; you should consult your own professional advisors and/or conduct your own due diligence for a complete and detailed understanding of such differences and any implications they might have on the relevant financial information contained in this presentation. Some numerical figures included in this report have been subjected to rounding adjustments. Accordingly, numerical figures shown as totals in certain tables might not be an arithmetic aggregation of the figures that preceded them.
 
  
 
Second Quarter and First Half of 2018 Unaudited Financial Results Conference Call
 
 
TBC Bank Group PLC ("TBC PLC") will release its unaudited consolidated financial results for the second quarter and first half of 2018 on Monday, 20 August 2018 at 7.00 am BST (10.00 am GET).
 
On that day, Vakhtang Butskhrikidze, CEO, and Giorgi Shagidze, CFO, will host a conference call to discuss the results.
 
Date & time:  Monday, 20 August 2018 at 14.00 (BST) / 15.00 (CEST) / 9.00 (EDT)
                                    
Please dial-in approximately five minutes before the start of the call quoting the password TBC:
 
 
 




Password:


TBC




UK Toll Free:


0808 109 0700




Standard International Access:


+44 (0) 20 3003 2666




USA Toll Free:


1 866 966 5335




New York New York:                                               


+1 212 999 6659




Russia Toll Free:


8 10 8002 4902044




Moscow:


+7 (8) 495 249 9843




 




Replay Numbers


 




Replay Passcode:


8861063




UK Toll Free:


0800 633 8453




Standard International Access:                               


+44 (0) 20 8196 1998




USA Toll Free:


1 866 583 1035




Russia Toll Free:


8 10 8002 4832044




Moscow:


+7 (8) 495 249 9840




 
 
 
 
 Contacts
 
 




Zoltan Szalai
Director of International Media and Investor Relations  
 
E-mail:  ZSzalai@Tbcbank.com.ge 
Tel:  +44 (0) 7908 242128
Web: www.tbcbankgroup.com
Address:  68 Lombard St, London EC3V 9LJ, United Kingdom 
 


Anna Romelashvili                                             
Head of Investor Relations
 
 
E-mail:  IR@tbcbank.com.ge 
Tel:  +(995 32) 227 27 27
Web: www.tbcbankgroup.com
Address: 7 Marjanishvili St. Tbilisi, Georgia 0102
 


Investor Relations Department
 
 
 
E-mail:  IR@tbcbank.com.ge 
Tel:  +(995 32) 227 27 27
Web: www.tbcbankgroup.com
Address: 7 Marjanishvili St. Tbilisi, Georgia 0102
 




 
 
 
 
 
Table of Contents
 
2Q and 1H 2018 Results Announcement
 
TBC Bank - Background
Financial Highlights
Recent Developments
Outlook
Letter from the Chief Executive Officer
Economic Overview
Unaudited Consolidated Financial Results Overview for 2Q 2018
Unaudited Consolidated Financial Results Overview for 1H 2018
Additional Disclosures
Principal Risks and Uncertainties
Statement of Directors' Responsibilities
Unaudited Condensed Consolidated Interim Financial Information
 
 
 
 
 
TBC BANK Group PLC ("TBC Bank")
 
TBC Bank Announces Unaudited 2Q and 1H 2018 and Consolidated Financial Results:
Underlying1 Net Profit for 2Q 2018 up by 38.8% YoY to GEL 119.9 million
Underlying1 Net Profit for 1H 2018 up by 17.8% YoY to GEL 217.4 million
 
 European Union Market Abuse Regulation EU 596/2014 requires TBC Bank Group PLC to disclose that this announcement contains Inside Information, as defined in that Regulation.
 
TBC Bank - Background
TBC Bank is the largest banking group in Georgia, where 99.7% of its business is concentrated, and where it has 37.1% market share by total assets. TBC Bank offers retail, corporate, and MSME banking nationwide.
These unaudited financial results are presented for TBC Bank Group PLC ("TBC Bank" or "the Group"), which was incorporated on 26 February 2016 as the ultimate holding company for JSC TBC Bank Georgia. TBC Bank became the parent company of JSC TBC Bank Georgia on 10 August 2016, following the Group's restructuring. As this was a common ownership transaction, the results have been presented as if the Group existed at the earliest comparative date allowed under the International Financial Reporting Standards ("IFRS") as adopted by the European Union. TBC Bank successfully listed on the London Stock Exchange's premium listing segment on 10 August 2016.
In 4Q 2016, TBC Bank acquired Bank Republic which has been consolidated into the Group's results.
The results reported below prior to 30 September 2016 relate to the group previously headed by JSC TBC Bank Georgia.
 
Financial Highlights
 
2Q 2018 P&L Highlights                                                        
 
§ Underlying[1] net profit amounted to GEL 119.9 million (2Q 2017: GEL 86.3 million; 1Q 2018: GEL 97.5 million)
§ Reported net profit amounted to GEL 102.4 million (2Q 2017: GEL 79.9 million; 1Q 2018: GEL 97.5 million)
§ Underlying1 return on equity (ROE) amounted to 24.9% (2Q 2017: 20.4%; 1Q 2018: 21.0%)
§ Reported return on equity (ROE) amounted to 21.3% (2Q 2017: 18.9%; 1Q 2018: 21.0%)
§ Underlying1 return on assets (ROA) amounted to 3.7% (2Q 2017: 3.2%; 1Q 2018: 3.2%)
§ Reported return on assets (ROA) amounted to 3.2% (2Q 2017: 3.0%; 1Q 2018: 3.2%)
§ Total operating income amounted to GEL 258.4 million, up by 24.8% YoY and up by 8.3% QoQ
§ Cost to income was 35.6% (2Q 2017: 44.9%; 1Q 2018: 38.1%)
§ Cost of risk stood at 1.8% (2Q 2017: 1.3%; 1Q 2018: 1.3%)
§ FX adjusted cost of risk stood at 1.7% (2Q 2017 1.5%; 1Q 2018: 1.7%)
§ Net interest margin (NIM) stood at 7.1% (2Q 2017: 6.8%; 1Q 2018: 6.9%)
§ Risk adjusted net interest margin (NIM) stood at 5.5% (2Q 2017: 5.3%; 1Q 2018: 5.2%)
 
1H 2018 P&L Highlights
 
§ Underlying1 Net profit amounted to GEL 217.4 million (1H 2017: GEL 184.5 million)
§ Reported Net profit amounted to GEL 200.0 million (1H 2017: GEL 176.4 million)
§ Underlying1 Return on equity (ROE) without one-offs of 23.0% (1H 2017: 22.5%)
§ Reported Return on equity (ROE) amounted to of 21.2% (1H 2017: 21.5%)
§ Underlying1 return on assets (ROA) was 3.4% (1H 2017: 3.5%)
§ Reported return on assets (ROA) was 3.1% (1H 2017: 3.3%)
§ Total operating income for the period was up by 21.1% YoY to GEL 497.1 million
§ Cost to income stood at 36.8% (1H 2017: 42.8%)
§ Cost of risk on loans stood at 1.6% (1H 2017: 1.1%)
§ FX adjusted cost of risk stood at 1.7% (1H 2017: 1.5%)
§ Net interest margin (NIM) stood at 7.0% (1H 2017: 6.7%)
§ Risk adjusted net interest margin (NIM) stood at 5.3% (1H 2017: 5.2%)
Balance Sheet Highlights as of 30 June 2018
§ Total assets amounted to GEL 13,584 million as of 30 June 2018, up by 20.4% YoY and up by 9.5% QoQ
§ Gross loans and advances to customers stood at GEL 8,896 million as of 30 June 2018, up by 20.4% YoY and up by 5.5% QoQ
§ Net loans to deposits + IFI funding stood at 89.5% and Net Stable Funding Ratio (NSFR) stood at 127.8%
§ NPLs stood at 3.1%, down by 0.3pp YoY and unchanged QoQ
§ NPLs coverage ratios stood at 116.1% or 216.1% with collateral on 30 June 2018 compared to 84.3% or 219.3% with collateral as of 30 June 2017[2] and 114.6% or 225.8% with collateral on 31 March 2018
§ Total customer deposits stood at GEL 7,933  million as of 30 June 2018, up by 19.0% YoY and up by 4.2% QoQ
§ As of 30 June 2018, the Bank's Tier 1 and Total Capital Adequacy Ratios (CAR) per the new NBG methodology stood at 13.4% and 17.0% respectively, while minimum requirements amounted to 10.2% and 15.6%
Market Shares[3]
§ Market share in total assets reached 37.1% as of 30 June 2018, up by 0.8pp YoY and up by 1.8pp QoQ
§ Market share in total loans was 38.3% as of 30 June 2018, up by 0.3pp YoY and up by 0.5pp QoQ
§ In terms of individual loans, TBC Bank had a market share of 39.8% as of 30 June 2018, down by 1.0pp YoY and up by 0.2pp QoQ. The market share for legal entity loans was 36.5%, up by 1.6pp YoY and up by 0.9pp QoQ
§ Market share of total deposits reached 39.5% as of 30 June 2018, down by 0.3pp YoY and up by 0.6pp QoQ
§ Market share of individual deposits attained to 41.2% up by 1.0pp YoY and up by 0.6pp QoQ. In terms of legal entity deposits, TBC Bank holds a market share of 37.5%, down by 1.9pp YoY and up by 0.5pp QoQ
 
 
Recent Developments
 
Strategic partnership agreement in Azerbaijan
§ TBC Bank has signed a conditional, non-binding strategic partnership agreement with Nikoil Open Join-Stock Company Investment Commercial Bank ("Nikoil Bank") to develop its business in Azerbaijan by merging TBC Bank's Azerbaijani subsidiary, TBC Kredit, with Nikoil Bank;
§ The merger is subject to the approval of all relevant authorities, the successful completion of due diligence and the fulfilment of certain other conditions. After the merger, TBC Bank would own up to 10% of the merged entity with a call option to acquire additional shares of the merged entity to reach a 50% +1 share interest at our sole discretion over a three-year period;
§ Subject to the completion of the merger, TBC Bank would contribute to the development and execution of the merged entity's strategy. TBC Bank would be represented on the board of Nikoil Bank and, together with Nikoil management, would play a crucial role in the future development of the company;
§ Without additional investment at the initial stage, the transaction will allow TBC Bank to become a shareholder in Azeri banking business with an option to benefit from the potential recovery of the Azeri economy and banking sector in the coming years.
 
Changes to the Georgian Tax Code
§ In 2Q 2018, TBC Bank reversed the one-off deferred tax gain recognized in 2016 due to the recent amendment to the Georgian Tax Code in relation to corporate income tax. The amendment, which came into force on 12 June 2018, postponed tax relief for re-invested profit from 1 January 2019 to 1 January 2023 for financial institutions. This reversal has resulted in a GEL 17.4 million expense on the profit and loss statement and a GEL 5.1 million reduction in equity in Q2 2018.
 
Launching Macroeconomic and Financial Sector Research
·      TBC Bank has launched a research portal -TBC Research, which provides analysis of developments in the Georgian economy and its various sectors, as well as in the region. TBC Research publications are available on www.tbcresearch.ge.
 
Outlook
 
International Strategy
To build upon our leading position in the Georgian market, the successful implementation of our digital strategy and the very promising results of our newly-launched fully-digital bank, Space, we will also consider entering other markets to further increase our banking operations beyond Georgia.
 
  
 
 
Additional Information Disclosure
Additional historical information for certain P&L, balance sheet and capital items, and on asset quality is disclosed on our Investor Relations website on http://tbcbankgroup.com/ under the Financial Highlights section.
 
Letter from the Chief Executive Officer
 
I am pleased to present another set of strong financial results for the second quarter 2018, driven by the successful execution of our strategy and the continued strong performance of the Georgian economy.
In the second quarter of 2018, we achieved an underlying consolidated net profit[4] of GEL 119.9 million, up by 38.8% year-on-year. As a result, our underlying return on equity reached 24.9%, up by 4.5 percentage points year-on-year, while the underlying return on assets was 3.7%, up by 0.5 percentage points year-on-year.
 
Our strong performance in the second quarter 2018 was driven by strong growth in operating income. Net interest margin improved to 7.1%, up by 0.3 percentage points year-on-year and 0.2 percentage points quarter-on-quarter. The increase was driven by a rise in yields on local currency loans both on a year-on-year and quarter-on-quarter basis resulting from our increased focus on loan yield management. In addition, the cost of funding decreased by 0.1 percentage points year-on-year, driven by a decrease in the cost of foreign currency deposits, which more than offset the increase of the Libor rate.
 
Net fee and commission income continued its strong growth in the second quarter 2018 and increased by 36.3% year-on-year, mainly driven by card and settlement operations. Over the same period, operating expenses decreased by 0.9% year-on-year on reported basis and increased only by 8.0% year-on-year on underlying basis. Quarter-on-quarter operating expenses remained broadly stable, despite seasonally low cost base in the first quarter. This was supported by increased automatisation in front and back offices and successful implementation of our digitalisation strategy, as well as cost synergies related to the integration of Bank Republic. Given the new levels of our income and improved cost management, we are confident to upgrade our medium term cost to income guidance from below 40% to below 35%.
 
We recorded strong balance sheet growth across all business segments in the second quarter 2018. Our loan book expanded by 20.4% year-on-year, which resulted in an increase in market share to 38.3%, up by 0.3 percentage points year-on-year. Over the same period our asset quality remained sound with FX adjusted cost of risk amounting to 1.7%, while our non-performing loans improved by 0.3 percentage points year-on-year and stood at 3.1%. Customer accounts grew by 19.0% year-on-year, leading to a market share of 39.5%.
We continue to operate with a strong capital base.  As of 30 June 2018, our total capital adequacy ratio (CAR) per Basel III guidelines stood at 17.0%, above the minimum requirement of 15.6%, while our tier I capital ratio was 13.4%, well above the minimum requirement of 10.2%. Our regulatory liquidity coverage ratio stood at 119%, compared to the minimum requirement of 100%, while net loans to deposits + IFI funding was 90% and the net stable funding ratio (NSFR) was 128%.
 
The macroeconomic environment in Georgia continues to be favourable. GDP growth has accelerated this year, reaching 5.7% in the first six months. Higher than expected growth led the National Bank of Georgia to revise its growth forecast to 5.5% for 2018, up from its previous projection of 4.8%. This strong performance was supported by the steady growth of exports, up by 28.5% year-on-year, and increasing tourism revenues, up by 25.3% year-on-year in 1H 2018. Over the same period, remittances also demonstrated solid growth, up by 18.3% year-on-year. Inflation has aligned closely to the 3.0% target and stood at 2.2% in June 2018. Lower inflationary risks led the National Bank of Georgia to decrease the policy rate by 0.25 basis point to 7.0% in July 2018. The strong macroeconomic environment continued to provide solid grounds for banking sector performance. Given the strong momentum in 2017 and in the first half of 2018, as well as strong performance in export and tourism, we expect that the economic growth will still outperform the initial GDP forecast despite the recent development in Turkey and the region and its potential impact on Georgian Economy.
I would also like to provide a brief update on our international business. As recently announced, we have signed a conditional, non-binding strategic partnership agreement with Nikoil Bank to further develop our business in Azerbaijan by merging our Azerbaijan subsidiary, TBC Kredit with Nikoil Bank. The merger is subject to the approval of all relevant authorities, the successful completion of due diligence and the fulfilment of certain other conditions.  After the merger, TBC Bank would own up to 10% of the merged entity with a call option to acquire additional shares of the merged entity to reach a 50% +1 share interest at our sole discretion over a three-year period. Subject to the completion of the merger, TBC Bank would contribute to the development and execution of the merged entity's strategy. TBC Bank would be represented on the board of Nikoil Bank and, together with Nikoil management, would play a crucial role in the future development of the company. Without additional investment at the initial stage, the transaction will allow us to become shareholders in Azeri banking business with an option to benefit from the potential recovery of the Azeri economy and banking sector in the coming years.
I am also delighted to report that the first few months of operations for Space, our fully digital bank, have exceeded our original expectations: it is gaining popularity very quickly and has attracted around 128,000 users as of 31 July 2018 since its launch in May 2018. According to our plans, Space will also play an important role in our strategy for the development of our business in Azerbaijan.
 
At the same time, our Georgian speaking chatbot, Ti-Bot, which is available through Facebook messenger, is becoming a widespread communication channel among our customers. As of 30 June 2018, the number of users totalled around 177,000 and the number of messages received reached 10.4 million since the launch in March 2017. Usage of the voice biometrics recognition system, which was launched in our call centre at the end of 2017, is also increasing. In June 2018, we conducted 64,000 successful authentications, which represented 34% of total calls received.
 
Importantly, the number of transactions conducted through digital channels continued to grow steadily, resulting in an offloading ratio[5] of 90.1% in the second quarter of 2018, up by 4.6 percentage points year-on-year, while the mobile penetration ratio[6] stood at 32.9%, up by 8.2 percentage points year-on-year.
 
 
Outlook
The second quarter 2018 proved to be very successful as we managed to record strong financial results and to continue our significant progress in our digitalization strategy. As stated above, we have decided to upgrade our medium term cost to income target to below 35%, while reconfirming our other medium-term targets: ROE of above 20%, dividend pay-out ratio of 25-35% and loan book growth of around 15%.
 
To build upon our leading position in the Georgian market, the successful implementation of our digital strategy and the very promising results of our newly-launched fully-digital bank, Space, we will also consider entering other markets to further increase our banking operations beyond Georgia.
 
 
 
Economic Overview
 
Economic growth
Economic growth continues to strengthen, supported by strong external as well as domestic demand. GDP growth averaged 5.3% in 1Q 2018 and improved further to 5.7% during the first half of 2018, notably higher than the 5.0% growth in 2017. Economic growth in 1Q 2018 was broad-based in almost all sectors of the economy.  Manufacturing (+5.6% YoY), trade and repairs (+5.1% YoY), hotels and restaurants (+10.9% YoY), construction (+8.7% YoY) and real estate (+13.4% YoY) represented the major drivers of growth in 1Q 2018, while almost all other sectors of the economy also posted positive growth rates. Given the faster than initially expected growth, the National Bank of Georgia revised the growth projection for 2018 to 5.5%, up from its previous projection of 4.8%.
 
Exports of goods increased by 30.0% YoY in 2Q 2018. Exports to the EU increased by 16.9% YoY, while exports to the CIS went up by 52.8% YoY. Exports increased also to other countries by 12.5% YoY over the same period. Growth of imports remained high (+22.7% YoY), reflecting the recovery in domestic investment and consumption demand.  Capital and intermediate goods went up by +24.9% YoY and remained the major driver of growth in total imports. Imports of consumer goods also increased by +11.2% YoY, while imports of petroleum and transportation goods increased by +22.8% YoY and +45.3% YoY, respectively.
 
Tourism inflows growth remained strong at 22.9% YoY in 2Q 2018. The number of visitors from the EU countries grew at the highest rate at 37.6% YoY, while visitors from the CIS and other countries grew at 9.3% YoY and 18.3% YoY, respectively.
 
Amid improved economic performance in the major remitting countries, remittances grew by 14.9% YoY. The growth of inflows was fastest from the EU (+31.7% YoY), followed by other countries (+15.7% YoY), and the CIS (+1.2% YoY). The EU became the major source for remittances inflows with 34.4% share of total inflows in 1H 2018, while the share of CIS countries stood at 34.1%.
 
The current account deficit remained almost unchanged in 1Q 2018, despite the stronger growth. Increased imports of goods, driven mostly by higher imports of capital and intermediate goods as well as petroleum products, were broadly balanced by increased exports of goods and higher tourism inflows. The current account deficit to GDP ratio stood at 9.0% over the last four quarters as of 1Q 2018, 0.1pp above the same ratio in 2017. 
 
In terms of domestic demand, consumption as well as investment demand drove GDP growth. Consumption increased by 5.4% YoY in 1Q 2018 in nominal terms. Increasing wages (+7.1% YoY) and remittances, as well as higher retail lending coupled with improved consumer confidence, drove consumption growth.
 
Investments growth accelerated to 28.7% YoY in 1Q 2018, reflecting improved business sentiments and the recovery of business lending. On top of that, higher investment growth was supported by public investments. Public capital spending grew by a solid 35.4% YoY in 1H 2018 and remained supportive of economic growth in the first half of 2018.
Growth of bank credit to the private sector stood at 18.5%[7] YoY, as of June 2018. Credit growth was mostly driven by the growth of loans in the national currency (+28.8% YoY), while foreign currency loans went up by 10.9% (excl. FX effect) over the same period. From the segments perspective, loans to individuals increased by 22.2% YoY and loans to legal entities by 15.5% YoY, both at constant exchange rates.
 
Recent developments in Turkey are expected to have negative impact on economic growth in Georgia. However, the magnitude should be moderate of around 0.5% of GDP, according to TBC Bank economic team estimates. Georgia's total exposure to Turkey as measured by exports, tourism, remittances and FDI inflows stood at around 6% of GDP and at around 10% of total inflows as of 2017. Existing structure of exports of goods enables us to argue that the impact on exports should be limited. As for the tourism inflows, while the purchasing power of visitors from Turkey is expected to decrease, the growth in number of visitors remains strong and is expected to be relatively less affected.  Remittances should decline the most, but given the small size, it will have limited impact on the overall growth. In addition, no material negative impact is expected from FDIs thanks to significant share of British Petroleum project in FDI inflows. While imports level from Turkey is substantial, overall weaker TRY is expected to substitute imports from other countries, rather than putting competitive pressures on domestic producers. Furthermore, due to large share of capital and intermediate goods in imports from Turkey, TRY depreciation can also be seen as a positive supply side shock.
  
 
 
Until August, the exchange rate of GEL against major currencies remained broadly stable. As of the end of June 2018, the USD/GEL exchange rate depreciated by 1.8% YoY, while the EUR/GEL exchange rate depreciated by 4.0% YoY. The real effective exchange rate gained 0.3% YoY in the same period. As of August 13, GEL depreciated  by 6% YoY against USD and by 3.3% against EUR. While GEL/TRY exchange rate appreciated substantially, GEL real effective exchange rate appeared to be around its trend.
.
Inflation and monetary policy
After the above target inflation in 2017, which was mostly driven by a one-off increase of excise taxes, inflation aligned closer to the target in the first half of 2018. As of June 2018, CPI inflation stood at 2.2%. The growth of prices of alcoholic beverages, tobacco, food and non-alcoholic beverages decelerated markedly, while clothing and footwear prices declined the most in June 2018.
 
Lower inflationary risks led the Monetary Policy Committee of the National Bank of Georgia to decrease the policy rate by 0.25 basis point to 7.0% in July 2018. According to the NBG, inflation is expected to remain close to its targeted level of 3.0% during the year. In committees' view, aggregate demand is approaching its potential level, which reduces downward pressure on prices. However, appreciation of the nominal effective exchange rate reduces inflationary pressures. At the same time, further reduction of the policy rate will be slower than projected by the NBG previously given the higher than expected recovery of aggregate demand.
 
Fiscal policy
The budget deficit over the last four quarters stood at 3.6% of GDP as of 1Q 2018, 0.2pp lower than the 2017 figure. Consolidated budget revenues posted 7.6% growth in the first half of 2018 while tax revenues went up by 5.8% YoY over the same period. In the first half of 2018, public infrastructure spending went up by 52.8% YoY, while current expenditures remained flat on an annual basis (+0.4% YoY in 1H 2018), resulting in a sizeable increase in the operating surplus of the consolidated budget (+52.8% YoY).
 
In July 2018 new changes in the tax code were approved, which broadens the definition of micro business and reduces the tax burden for these types of businesses. These changes are expected to further promote business activity in this segment.
 
 
Going forward
The Georgian economy continues its solid growth performance supported by the favorable external environment and stronger domestic demand. Continued reforms help to accelerate growth and outperform most of Georgia's peer countries in Eastern Europe and CIS. As per the IMF's projections, growth is expected to average 5% over the next five years, well above the average growth in the broader region.
 
 
 
Unaudited Consolidated Financial Results Overview for 2Q 2018
 
This statement provides a summary of the unaudited business and financial trends for 2Q 2018 for TBC Bank Group plc and its subsidiaries. Quarterly financial information and trends are unaudited.
TBC Bank Group PLC financial results are adjusted for certain one-off items, to enable better analysis of the Group's performance. The reconciliation of the underlying profit and loss items with the reported profit and loss items and the underlying ratios are given in annex 20 on pages 47-48.
Starting from 1 January 2018, TBC Bank adopted IFRS 9 and IFRS 15 as explained in details in note 2 to consolidated financial statements on pages: 69-75. Therefore, the comparative information for 2017 is not comparable to the information presented for 2018.
Please note, that there might be slight differences in previous periods' figures due to rounding,
 




Income Statement Highlights
 


 


 


 


 


 




in thousands of GEL


2Q'18


1Q'18


2Q'17


Change YoY


Change QoQ




Net Interest Income


188,204


                     175,403


                     149,741


25.7%


7.3%




Net Fee and Commission Income


39,162


                       34,920


                       28,741


36.3%


12.1%




Other Operating Non-Interest Income


31,052


                       28,376


                       28,610


8.5%


9.4%




Provisioning Charges


(35,091)


                     (39,463)


                     (25,715)


36.5%


-11.1%




Operating Income after Provisions for Impairment


223,327


                     199,236


                     181,377


23.1%


12.1%




Operating Expenses


(92,090)


                     (90,932)


                     (92,930)


-0.9%


1.3%




Profit Before Tax


131,237


                     108,304


                       88,447


48.4%


21.2%




Income Tax Expense


(28,799)


                     (10,779)


                       (8,590)


NMF


NMF




Reported Profit for the Period


102,438


                       97,525


                       79,857


28.3%


5.0%




Underlying Profit for the Period


119,864


97,526


86,349


38.8%


22.9%




  NMF - no meaningful figures
 




Balance Sheet and Capital Highlights


 


 


 


 


 




 


 


 


 


 


 




 


Jun-18


Mar-18


Change QoQ




In Millions


GEL


USD


GEL


USD


 




Total Assets


13,584


5,541


12,401


5,136


9.5%




Gross Loans


8,896


3,629


8,433


3,493


5.5%




Customer Deposits


7,933


3,236


7,611


3,152


4.2%




Total Equity


1,944


793


1,930


800


0.7%




Regulatory Tier I Capital (Basel III)*


1,499


611


1,517


628


-1.2%




Regulatory Total Capital (Basel III)*


1,908


778


1,943


805


-1.8%




Regulatory Risk Weighted Assets (Basel III)*


11,200


4,569


11,000


4,556


1.8%




*Per new NBG regulation which came into force in December 2017
 




Key Ratios
 


2Q'18


1Q'18


2Q'17


Change YoY


Change QoQ




Underlying ROE


24.9%


21.0%


20.4%


4.5%


3.9%




Reported ROE


21.3%


21.0%


18.9%


2.4%


0.3%




Underlying ROA


3.7%


3.2%


3.2%


0.5%


0.5%




Reported ROA


3.2%


3.2%


3.0%


0.2%


0.0%




Cost to Income


35.6%


38.1%


44.9%


-9.3%


-2.5%




Cost of Risk


1.8%


1.3%


1.3%


0.5%


0.5%




FX adjusted Cost of Risk


1.7%


1.7%


1.5%


0%


0.2%




NPL to Gross Loans


3.1%


3.1%


3.4%


-0.3%


0.0%




Regulatory Tier 1 CAR (Basel III)*


13.4%


13.8%


10.8%


2.6%


-0.4%




Regulatory Total CAR (Basel III)*


17.0%


17.7%


14.6%


2.4%


-0.5%




Leverage (Times)


7.0x


6.4x


6.7x


0.3x


0.6x




*2018 figures are given per new NBG regulation, which came into force in December 2017, while 2Q 2017 figures are given based on previous regulation in accordance with Basel II/III guidelines
 
 
 
Income Statement Discussion
 
Net interest Income
 




In thousands of GEL


2Q'18


1Q'18


2Q'17


Change YoY


Change QoQ




Loans and Advances to Customers


270,378


256,053


223,665


20.9%


5.6%




Investment Securities Available for Sale


11,968


13,167


10,286


16.4%


-9.1%




Due from Other Banks


7,027


4,919


3,157


NMF


42.9%




Bonds Carried at Amortized Cost


9,842


8,037


7,809


26.0%


22.5%




Investment in Leases


8,937


7,673


4,981


79.4%


16.5%




Interest Income


308,152


289,849


249,898


23.3%


6.3%




Customer Accounts


64,804


62,923


54,560


18.8%


3.0%




Due to Credit Institutions


44,785


41,477


36,589


22.4%


8.0%




Subordinated Debt


9,959


9,640


8,502


17.1%


3.3%




Debt Securities in Issue


400


406


506


-20.9%


-1.7%




Interest Expense


119,948


114,446


100,157


19.8%


4.8%




Net Interest Income


188,204


175,403


149,741


25.7%


7.3%




 


 


 


 


 


 




Net Interest Margin


7.1%


6.9%


6.8%


0.3%


0.2%




NMF - no meaningful figures
 
2Q 2018 to 2Q 2017 Comparison
Net interest income increased by GEL 38.5 million, or 25.7%, to GEL 188.2 million, compared to 2Q 2017, driven by a GEL 58.3 million, or 23.3%, higher interest income and a GEL 19.8 million, or 19.8%, higher interest expense.
Interest income grew by GEL 58.3 million, or 23.3%, YoY to GEL 308.2 million, mainly due to an increase in interest income from loans and advances to customers of GEL 46.7 million or 20.9%, which is primarily related to an increase in gross loan portfolio of GEL 1,510 million, or 20.4%, YoY. This effect was further magnified by a 0.1pp increase in loan yields, which was partially driven by increase in rates on GEL denominated loans by 1.3pp to 18.3%, that offset the decrease in yields on FC denominated loans by 1.1pp to 8.4%. The growth in interest income also resulted from a GEL 3.9 million, or 122.6%, higher interest income due from credit institutions and a GEL 4.0 million, or 79.4%, higher interest income from investment in leases(through our subsidiary), due to an increase in the size of the respective portfolios as well as an increase in their respective yields. Yields on amounts due from credit institutions have increased by 1.6pp and stood at 3.1%, while yields on investments in financial leases have increased by 0.6pp, amounting to 22.3%. Yields on interest earning assets expanded by 0.4pp to 11.7%, compared to 2Q 2017.
The GEL 19.8 million, or 19.8%, YoY growth in interest expense to GEL 119.9 million in 2Q 2018 was mainly due to GEL 10.2 million, or 18.8%, increase in interest expense on customer accounts and GEL 8.2 million, or 22.4%, increase in interest expense on amounts due to credit institutions. The increase in interest expense on customer accounts was attributable to a GEL 1,266.2 million, or 19.0%, growth in the respective portfolio. This effect was slightly offset by a 0.2pp drop in the cost of deposits to 3.3%, which resulted from a 0.4pp decrease in the cost of FC denominated deposits to 2.1%, while the cost of LC denominated deposits remained stable and stood at 5.8%. The increase in interest expense on amounts due to credit institutions was attributable to a GEL 784.1 million, or 33.9% increase in the respective portfolio and a 0.5pp increase in effective rates on the amounts due to credit institutions, up to 6.9%. The cost of funding decreased by 0.1pp and stood at 4.4%.
Consequently, NIM was 7.1% in 2Q 2018, compared to 6.8% in 2Q 2017, while the risk adjusted NIM stood at 5.5%, compared to 5.3% in 2Q 2017.
2Q 2018 to 1Q 2018 Comparison
On a QoQ basis, net interest income grew by 7.3% as a result of a 6.3% higher interest income and a 4.8% higher interest expense.
The GEL 18.3 million, or 6.3%, QoQ increase in interest income mainly resulted from the growth in interest income on loans by GEL 14.3 million, or 5.6%. This in turn was due both to an increase in loan portfolio of GEL 463 million, or 5.5%, and to a 0.2pp higher yield on loans. The increase in interest income was also magnified by an increase in interest income from due from other banks by GEL 2.1 million, or 42.9%, due to both growth in the respective portfolio and an increase in the respective yield by 0.9pp to 3.1%. The yield on interest earning assets, which stood at 11.5% in 1Q 2018, increased by 0.2pp.
The GEL 5.5 million, or 4.8%, QoQ increase in interest expense was primarily due to the GEL 3.3 million, or 8.0%, increase in interest expense on amounts due to credit institutions. The main driver of this increase was a rise in the balance of the respective portfolio by GEL 827.5 million, or 36.5%. The respective effective rate decreased by 0.1pp and stood at 6.9%. Another contributor to the increase in interest expense was the 3.0% higher interest expense on customer accounts. This, in turn, resulted from the GEL 321.8 million, or 4.2%, increase in the respective portfolio, while the cost of deposits remained flat and stood at 3.3%. The cost of funding remained stable and stood at 4.4%.
Consequently, on a QoQ basis, NIM increased by 0.2 pp in 2Q 2018, compared to 6.9% in 1Q 2018. Meanwhile risk adjusted NIM increased by 0.3pp compared to the previous quarter and stood at 5.5%.
 




Fee and Commission Income


 


 


 


 




 


 


 


 


 


 




In thousands of GEL


2Q'18


1Q'18


2Q'17


Change YoY


Change QoQ




Card Operations


25,274


21,736


19,416


30.2%


16.3%




Settlement Transactions


17,454


16,239


14,063


24.1%


7.5%




Guarantees Issued


4,859


4,220


3,328


46.0%


15.1%




Issuance of Letters of Credit


1,289


1,071


2,050


-37.1%


20.4%




Cash Transactions


4,543


4,445


4,042


12.4%


2.2%




Foreign Currency  Exchange Transactions


406


490


362


12.2%


-17.1%




Other


4,440


2,633


1,958


126.8%


68.6%




Fee and Commission Income


58,265


50,834


45,219


28.9%


14.6%




Card Operations


12,975


10,468


11,229


15.5%


23.9%




Settlement Transactions


2,143


2,142


1,866


14.8%


0.0%




Guarantees Issued


313


307


294


6.5%


2.0%




Letters of Credit


327


261


252


29.8%


25.3%




Cash Transactions


1,242


1,117


1,098


13.1%


11.2%




Foreign Currency  Exchange Transactions


3


2


1


NMF


50.0%




Other


2,100


1,617


1,738


20.8%


29.9%




Fee and Commission Expense


19,103


15,914


16,478


15.9%


20.0%




Card Operations


12,299


11,268


8,187


50.2%


9.1%




Settlement Transactions


15,311


14,097


12,198


25.5%


8.6%




Guarantees


4,546


3,913


3,034


49.8%


16.2%




Letters of Credit


961


811


1,798


-46.6%


18.5%




Cash Transactions


3,301


3,328


2,944


12.1%


-0.8%




Foreign Currency  Exchange Transactions


403


488


361


11.6%


-17.4%




Other


2,341


1,015


219


NMF


130.6%




Net Fee And Commission Income


39,162


34,920


28,741


36.3%


12.1%




 
2Q 2018 to 2Q 2017 Comparison
In 2Q 2018, net fee and commission income totalled GEL 39.2 million, up by GEL 10.4 million, or 36.3%, compared to 2Q 2017. This mainly resulted from the following sources: an increase in net fee and commission income from card operations of GEL 4.1 million, or 50.2%; an increase in net fee and commission income from settlement transactions of GEL 3.1 million, or 25.5%; and an increase in net fee and commission income from guarantees received of GEL 1.5 million, or 49.8%. In 2Q 2018 other net fee and commission income increased by GEL 2.1 million, mainly due to the arrangement fee of GEL 1.3 million related to one corporate client.
 
The rise in net fee and commission income from card operations is related to the increased number of active cards and POS terminals by 25% and 11% respectively. The increase in net fee and commission income from settlement transactions was mainly related to our subsidiary, TBC Pay, driven by increased number of transactions and the growth in net fee and commission income from our affluent retail sub-segment, TBC Status.
 
2Q 2018 to 1Q 2018 Comparison
On a QoQ basis, net fee and commission income increased by GEL 4.2 million, or 12.1%, compared to 1Q 2018. This was primarily driven by an increase in net fee and commission income from card transactions of GEL 1.0 million, or 9.1%, and an increase in net fee and commission income from settlement transactions of GEL 1.2 million, or 8.6% related to increased scale of business, as well as seasonally low fee and commission income in the first quarter. In 2Q 2018, other net fee and commission income increased by GEL 1.3 million, mainly due to the arrangement fee related to one corporate client, as mentioned above.
 




Other Operating Non-Interest Income and Gross Insurance Profit


 


 


 


 




In thousands of GEL


2Q'18


1Q'18


2Q'17


Change YoY


Change QoQ




Net Income from Foreign Currency Operations


23,251


19,554


23,237


0.1%


18.9%




Share of Profit of Associates


340


308


484


-29.8%


10.4%




Gains Less Losses/(Losses Less Gains) from Derivative Financial Instruments


396


17


(35)


NMF


NMF




Revenues from Cash-In Terminal Services


226


1,027


334


-32.3%


-78.0%




Revenues from Operational Leasing


1,567


1,575


1,726


-9.2%


-0.5%




Gain from Sale of Investment Properties


855


1,041


982


-12.9%


-17.9%




Gain from Sale of Inventories of Repossessed Collateral


100


105


591


-83.1%


-4.8%




Administrative Fee Income from International Financial Institutions


-


-


(151)


NMF


NMF




Revenues from Non-Credit Related Fines


111


143


46


NMF


-22.4%




Gain on Disposal of Premises and Equipment


154


45


164


-6.1%


NMF




Other


799


2,515


(624)


NMF


-68.2%




Other Operating Income


3,812


6,451


3,068


24.3%


-40.9%




Gross Insurance Profit[8]


3,253


2,046


1,856


75.3%


59.0%




Other Operating Non-Interest Income and Gross Insurance Profit


31,052


28,376


28,610


8.5%


9.4%




NMF - no meaningful figures
 


 


 


 


 


 




 


 


 


 


 


 



 
 
 
 
 
 
 



2Q 2018 to 2Q 2017 Comparison 
Total other operating non-interest income and gross insurance profit grew by GEL 2.4 million, or 8.5%, to GEL 31.1 million in 2Q 2018. This increase primarily resulted from the growth in other operation income by GEL 0.7 million, or 24.3%, and the increase in gross insurance profit of GEL 1.4 million, or 75.3%. 
 
The increase in gross insurance profit was related to a sharp increase in the number of customers by around 122,000, which in turn led to a high increase in gross written premium by 133.9% YoY to GEL 14,677 on a stand-alone basis. As a result, according to internal estimates, P&C market share reached 17.9%. More information about TBC insurance can be found in annex 19 on page 46.
 
 
2Q 2018 to 1Q 2018 Comparison
On a QoQ basis, total other operating non-interest income and gross insurance profit increased by GEL 2.7 million, or by 9.4%. This increase mainly resulted from the growth in net income from foreign currency operations by GEL 3.7 million, or by 18.9%, related to higher turnover of FX operations, as well as growth in gross insurance by GEL 1.2 million or 59.0%. This was partially offset by the decrease in other operating income by GEL 2.6 million.




Provision for Impairment


 


 


 


 


 




In thousands of GEL


2Q'18


1Q'18


2Q'17


Change YoY


Change QoQ




Provision for Loan Impairment


(37,982)


(27,998)


(23,444)


62.0%


35.7%




Provision for Impairment of Investments in Finance Lease


(252)


(241)


(97)


NMF


4.6%




Provision for/(Recovery of Provision) Performance Guarantees and Credit Related Commitments


1,375


(3,875)


1,454


-5.4%


NMF




Provision for Impairment of Other Financial Assets


1,950


(7,419)


(3,628)


NMF


NMF




Impairment of Investment Securities Available for Sale


(182)


70


-


NMF


NMF




Total Provision Charges for Impairment


(35,091)


(39,463)


(25,715)


36.5%


-11.1%




Operating Income after Provisions for Impairment


223,327


199,236


181,377


23.1%


12.1%




 


 


 


 


 


 




Cost of Risk


1.8%


1.3%


1.3%


0.5%


0.5%




NMF - no meaningful figures
 


 


 


 


 


 




 
2Q 2018 to 2Q 2017 Comparison
In 2Q 2018, total provision charges grew by GEL 9.4 million to GEL 35.1 million compared to 2Q 2017.
 
This increase was primarily attributable to an increase in loan loss provision charges of GEL 14.5 million, which was driven by the corporate segment. The increase in provision charges in the corporate segment was driven by (i) the recovery of provisions in 2Q 2017 due to one group of borrowers and overall improved performance of the loan book; and (ii) the creation of provision for one corporate borrower in 2Q 2018. Increased provision charges on loans were partially offset by a recovery of provisions in other financial assets of GEL 5.6 million, due to the partial recovery of one debtor, which was provisioned at around 80% in previous quarters.
 
In 2Q 2018, the cost of risk stood at 1.8% (1.7% without the FX effect), compared to 1.3% (1.5% without the FX effect) in 2Q 2017.
 
2Q 2018 to 1Q 2018 Comparison
On a QoQ basis, total provision charges decreased by GEL 4.4 million, or 11.1%, amounting to GEL 35.1 million.
The decrease was mainly driven by the recovery of provisions in guarantees and credit related commitments of GEL 5.2 million, attributable to one corporate client's guarantee and other financial assets of GEL 9.4 million  (as mentioned above). The decrease was partially offset by increased provision charges on loans amounting to GEL 10 million. The increase was mainly related to the corporate segment, and was primarily driven by one corporate borrower in 2Q 2018, as well as low provision charges in 1Q 2018 as a result of GEL appreciation.
In 2Q 2018, the cost of risk stood at 1.8% (1.7% without the FX effect), compared to 1.3% (1.7% without the FX effect) in 1Q 2018.




Operating Expenses


 


 


 


 


 




 


 


 


 


 


 




In thousands of GEL


2Q'18


1Q'18


2Q'17


Change YoY


Change QoQ




Staff Costs


50,732


52,115


54,838


-7.5%


-2.7%




Provisions for Liabilities and Charges


-


-


(2,400)


-100.0%


NMF




Depreciation and Amortization


10,992


10,471


8,919


23.2%


5.0%




Professional services


1,498


2,961


2,410


-37.8%


-49.4%




Advertising and marketing services


7,117


4,527


3,737


90.4%


57.2%




Rent


5,843


5,864


5,753


1.6%


-0.4%




Utility services


1,453


1,735


1,302


11.6%


-16.3%




Intangible asset enhancement


2,572


2,494


2,567


0.2%


3.1%




Taxes other than on income


1,946


1,657


1,301


49.6%


17.4%




Communications and supply


1,160


1,033


1,015


14.3%


12.3%




Stationary and other office expenses


1,324


1,183


1,140


16.1%


11.9%




Insurance


483


485


1,446


-66.6%


-0.4%




Security services


506


496


483


4.8%


2.0%




Premises and equipment maintenance


1,128


1,035


1,054


7.0%


9.0%




Business trip expenses


669


320


543


23.2%


NMF




Transportation and vehicles maintenance


413


379


381


8.4%


9.0%




Charity


281


280


145


93.8%


0.4%




Personnel training and recruitment


233


176


323


-27.9%


32.4%




Write-down of current assets to fair value less costs to sell


(567)


(3)


(126)


NMF


NMF




Loss on disposal of Inventory


80


20


231


-65.4%


NMF




Loss on disposal of investment properties


30


30


385


-92.2%


0.0%




Loss on disposal of premises and equipment


58


278


48


20.8%


-79.1%




Impairment of intangible assets


-


-


1,850


-100.0%


NMF




Gains/(losses) on initial recognition of assets at rates above/below market


-


-


-


NMF


NMF




Acquisition costs


-


-


518


-100.0%


NMF




Gross Change in IBNR


-


-


170


-100.0%


NMF




Other


4,139


3,396


4,897


-15.5%


21.9%




Administrative and Other Operating Expenses


30,366


28,346


31,573


-3.8%


7.1%




Operating Expenses


92,090


90,932


92,930


-0.9%


1.3%




Profit before Tax


131,237


108,304


88,447


48.4%


21.2%




Income Tax Expense


(28,799)


(10,779)


(8,590)


235.3%


167.2%




Profit for the Period


102,438


97,525


79,857


28.3%


5.0%




 


 


 


 


 


 




Cost to Income


35.6%


38.1%


44.9%


-9.3%


-2.5%




ROE


21.3%


21.0%


18.9%


2.4%


0.3%




ROA


3.2%


3.2%


3.0%


0.2%


0.0%




 
2Q 2018 to 2Q 2017 Comparison
In 2Q 2018, total operating expenses decreased to GEL 92.1 million, down by GEL 0.8 million, or by 0.9% YoY, primarily due to a decrease in staff costs of GEL  4.1 million, or 7.5% YoY. Higher staff costs in 2Q 2017 were related to the one-off cost related to Bank Republic integration in the amount of GEL 3.1 million. Another contributor was the decrease in administrative expenses by GEL 1.2 million, or 3.8%, due to the fact that, in 2Q 2017 TBC Bank incurred GEL 4.6 million in administrative and other operating expenses related to the Bank Republic integration. The decrease in staff costs and administrative expenses was offset by an increase in depreciation and amortisation costs of GEL 2.1 million, or 23.2%, related to the overall growth of the scale of the business, as well as the reversal of provisions for liabilities and charges related to the recovery of tax provisions in 2Q 2017 in the amount of GEL 2.4 million.
 
As a result, the reported cost to income ratio markedly decreased to 35.6% in 2Q 2018, compared to the reported 44.9% in 2Q 2017. The underlying cost to income ratio decreased by 5.6pp compared to the underlying 41.2% in 2Q 2017.
 
 
2Q 2018 to 1Q 2018 Comparison
On a QoQ basis, total operating expenses increased by a GEL 1.2 million, or 1.3%. The increase was primarily attributable to a GEL 2.0 million, or 7.1% increase in administrative expenses, mainly related to advertising and marketing services that that are not equally spent and/or accrued during the year among other things due to seasonality. This was partially offset by decrease in the costs of professional services. The increase in administrative expenses was partially offset by a decrease in staff cost by GEL 1.4 million, or by 2.7%.
 
As a result, the cost to income ratio decreased by 2.5pp from 38.1%, compared to 1Q 2018.
 
Income Tax
In 2Q 2018, TBC Bank reversed the one-off deferred tax gain recognized in 2016 due to the recent amendment to the Georgian Tax Code in relation to corporate income tax. The amendment, which came into force on 12 June 2018, postponed tax relief for re-invested profit from 1 January 2019 to 1 January 2023 for financial institutions. This reversal resulted in a GEL 17.4 million expense on the profit and loss statement and a GEL 5.1 million contraction in equity in 2Q 2018.
 
Net Income
Reported net income for the second quarter increased by GEL 4.9 million, or 5.0%, QoQ and up by GEL 22.6 million, or 28.3%, YoY and amounted to GEL 102.4 million. Underlying net income increased by GEL 22.3 million, or 22.9%, QoQ and by GEL 33.5 million, or 38.8%, YoY and amounted to GEL 119.9 million.
 
As a result, underlying ROE stood at 24.9%, up by 4.5pp YoY and 3.9pp QoQ, while underlying ROA stood at 3.7%, up by 0.5pp both YoY and QoQ. Reported ROE stood at 21.3%, up by 2.4pp YoY and 0.3pp QoQ, while reported ROA stood at 3.2%, up by 0.2pp YoY but remaining flat QoQ.




 
Balance Sheet Discussion


 


 


 




In millions of GEL


30-Jun


31-Mar


Change QoQ




Cash, Due from Banks and Mandatory Cash Balances with NBG


2,682


2,247


19.4%




Loans and Advances to Customers (Net)


8,575


8,137


5.4%




Financial Securities


1,296


1,011


28.2%




Fixed and Intangible Assets & Investment Property


540


531


1.7%




Other Assets


491


475


3.4%




Total Assets


13,584


12,401


9.5%




Due to Credit Institutions


3,098


2,270


36.5%




Customer Accounts


7,933


7,611


4.2%




Debt Securities in Issue


20


19


5.3%




Subordinated Debt


398


402


-1.0%




Other Liabilities


191


169


13.0%




Total Liabilities


11,640


10,471


11.2%




Total Equity


1,944


1,930


0.7%




 
Assets
On a QoQ basis, total assets increased by GEL 1,182 million, or 9.5%, partially due to a GEL 438 million, or 5.4%, increase in net loans to customers. The QoQ increase in total assets also resulted from a GEL 435 million or 19.4% rise in liquid assets (comprising cash, due from banks and mandatory cash balances with NBG) and a GEL 285 million or 28.2% increase in financial securities.
 
As of 30 June 2018, the gross loan portfolio reached GEL 8,896 million, up by 5.5% QoQ. At the same time, gross loans denominated in foreign currency accounted for 58.5% of total loans, compared to 58.2% as of 31 March 2018.
 
 
Asset Quality
Foreign Currency Income Linked Borrowers
 




 


30-Jun-18


31-Mar-18




Segments


FC share


FC linked income borrowers share


FC share


FC linked income borrowers share




Retail


50.6%


26.9%


49.4%


25.4%




Consumer


18.2%


25.6%


18.0%


24.5%




Mortgage


80.4%


27.2%


80.0%


25.6%




Corporate


76.7%


53.5%*


76.1%


53.1%*




MSME


51.8%


14.3%


53.2%


14.9%




Total Loan Portfolio


58.5%


34.4%


58.2%


33.9%




  (Based on internal estimates)
* Pure exports account for 7.0% of total Corporate FX denominated loans
 




PAR 30 by Segments and Currencies


 


 


 


 


 


 




 


 


 


 


 


 


 




Par 30


Jun-18


Mar-18




 


GEL


FC


Total


GEL


FC


Total




Corporate


0.0%


0.4%


0.3%


0.0%


1.1%


0.9%




Retail


3.7%


1.8%


2.7%


2.9%


1.7%


2.3%




MSME


1.6%


3.7%


2.7%


1.9%


3.5%


2.7%




Total


2.5%


1.7%


2.0%


2.2%


1.9%


2.0%




loans overdue by more than 30 days to gross loans


 


 


 


 


 


 




 
 
Total
Total PAR 30 remained stable QoQ and stood at 2.0%. The increase in retail book of 0.4 pp was offset by a decline in corporate book of 0.6pp. Decrease in corporate segment was mainly driven by high recoveries of overdue amounts.
 
Retail Segment
The retail segment’s PAR 30 amounted to 2.7%, up by 0.4pp QoQ. The increase was mainly attributable to credit cards and higher yield products.
 
Corporate
The corporate segment’s PAR 30 amounted to 0.3%, down by 0.6pp QoQ. Decrease in corporate segment was mainly driven by high recoveries of overdue amounts.
 
MSME
The MSME segment’s PAR 30 remained stable QoQ and stood at 2.7% as of 30 June 2018.




NPLs

 
 
 
 
 
 


 
 
 
 
 
 
 



NPLs


Jun-18


Mar-18



 

GEL


FC


Total


GEL


FC


Total




Corporate


1.5%


3.2%


2.8%


0.9%


3.0%


2.5%




Retail


2.8%


2.9%


2.9%


2.4%


3.0%


2.7%




MSME


2.2%


5.7%


4.0%


2.6%


6.2%


4.5%




Total


2.4%


3.6%


3.1%


2.2%


3.7%


3.1%




 
 
Total
Total NPLs stood at 3.1% and remained the same on a QoQ basis. 
 
Retail Segment
The retail segment’s NPLs stood at 2.9%, up by 0.2pp compared to 2Q 2018 due to credit cards and higher yield products as anticipated and provisioned appropriately at disbursement.
 
Corporate
The corporate segment’s NPLs stood at 2.8%, up by 0.3pp on a QoQ basis mainly related to one corporate borrower.
 
MSME
The MSME segment’s NPLs declined by 0.5pp on a QoQ basis, to 4.0% driven by the improved performance of both SME and micro portfolios.
 




NPLs Coverage

 
 
 
 


 
 
 
 
 



NPLs Coverage


Jun-18


Mar-18




 


Exc. Collateral


Incl. Collateral


Exc. Collateral


Incl. Collateral




Corporate


99.2%


232.1%


103.8%


275.5%




Retail


153.9%


226.8%


157.6%


235.6%




MSME


76.9%


187.6%


70.2%


179.2%




Total


116.1%


216.1%


114.6%


225.8%




 
 
Liabilities
As of 30 June 2018, TBC Bank's total liabilities amounted to GEL 11,640 million, up by GEL 1,169 million, or 11.2%, QoQ. The increase was primarily due to a GEL 827.5 million, or 36.5%, increase in amounts due to credit institutions and an increase in customer accounts of GEL 321.8 million, or 4.2%. Total liabilities also grew due to an increase in deferred income tax liability of GEL 22.3 million, which was mainly related to the reversal of deferred tax gains, as mentioned above.  
 
Liquidity
As of 30 June 2018 the Bank's liquidity ratio, as defined by the NBG, stood at 33.3%, compared to 30.8% as of 31 March 2018. As of 30 June 2018, the total liquidity coverage ratio (LCR), as defined by the NBG, was 119.2%, above the 100.0% limit, while the LCR in GEL and FC stood at 105.0% and 129.0% respectively, above the respective limits of 75% and 100%.
 
Total Equity
As of 30 June 2018, TBC's total equity amounted to GEL 1,943.7 million, up by GEL 13.3 million from GEL 1,930.4 million as of 31 March 2018. The QoQ change in equity was due to increase in net income GEL 102.6 million, which was partially offset by a dividend distribution in May 2018 in the amount of GEL 88.9 million.
 
Regulatory Capital
According to the new methodology that was introduced at the end of 2017, as of 30 June 2018 the Bank's Basel III Tier 1 and Total Capital Adequacy Ratios (CAR) stood at 13.4% and 17.0%, respectively, compared to the minimum required levels of 10.2% and 15.6%. In comparison, as of 31 March 2018, the Bank's Basel III Tier 1 and Total Capital Adequacy Ratios (CAR) stood at 13.8% and 17.7%, respectively, compared to the minimum required levels of 10.2% and 15.0%.
 
In 30 June 2018, The Bank's Basel III Tier 1 Capital amounted to GEL 1,498.9 million, down by GEL 18.4 million, or 1.2%, compared to March 2018.  The Bank's Basel III Total Capital amounted to GEL 1,908.4 million, down by GEL 35.0 million, or 1.8%, QoQ. The decrease in Tier 1 and Total Capital was due to a dividend distribution in May. Risk Weighted Assets amounted to GEL 11,200.4 million as of 30 June 2018, compared to GEL 10,999.6 million as of 31 March 2018.
 
 
Results by Segments and Subsidiaries
The segment definitions are as follows (updated in 2018):
·      Corporate - a legal entity/group of affiliated entities with an annual revenue exceeding GEL 12.0 million, or which have been granted facilities of more than GEL 5 million. Some other business customers may also be assigned to the corporate segment or transferred to MSME on a discretionary basis;
·      MSME (Micro, Small and Medium) - business customers who are not included in either the corporate or the retail segments; or legal entities who have been granted a pawn shop loan; or individual customers of the newly launched, fully digital bank-Space;
·      Retail - non-business individual customers or individual business customers who have been granted mortgage loans; all individual customers are included in retail deposits;
·      Corporate Centre - comprises the Treasury, other support and back office functions, and the non-banking subsidiaries of the Group;
Business customers are all legal entities or individuals who have been granted a loan for business purpose.
Summary of key changes:
·      The limits for corporate customers have been increased from GEL 8.0 million to GEL 12.0 million for annual revenue and from USD 1.5 million to GEL 5.0 million for granted facilities. Additionally as allowed by policy, some customers were moved to corporate segment on discretionary basis considering practical aspects of client account servicing and administration. As a result, the increase amounted to GEL 66 million and GEL 78 million for corporate loan portfolio and corporate deposit portfolio, respectively.
·      Certain sub-categories for the individual business customers that are granted non mortgage loans have been moved from retail to MSME segment.  Subsequently, GEL 236 million was transferred from retail to MSME loan portfolio.
Income Statement by Segments




2Q'18


Retail


MSME


Corporate


Corp.Centre


Total




Interest Income


149,707


61,535


60,620


36,290


308,152




Interest Expense


(29,515)


(2,324)


(32,965)


(55,144)


(119,948)




Net Transfer Pricing


(19,709)


(20,014)


11,877


27,846


-




Net Interest Income


100,483


39,197


39,532


8,992


188,204




Fee and Commission Income


40,881


5,470


11,561


353


58,265




Fee and Commission Expense


(15,377)


(1,669)


(1,984)


(73)


(19,103)




Net fee and Commission Income


25,504


3,801


9,577


280


39,162




Gross Insurance Profit


-


-


-


3,253


3,253




Net income from foreign currency operations


6,218


5,168


11,046


(731)


21,701




Foreign Exchange Translation Gains Less Losses/(Losses Less Gains)


-


-


-


1,550


1,550




Net Losses from Derivative Financial Instruments


-


-


-


396


396




Other Operating Income


1,530


156


2,285


(159)


3,812




Share of profit of associates


-


-


-


340


340




Other Operating Non-Interest Income and Insurance Profit


7,748


5,324


13,331


4,649


31,052




Provision for Loan Impairment


(26,988)


(5,090)


(5,904)


-


(37,982)




(Provision)/Recovery of Provision for Liabilities, Charges and Credit Related Commitments


(243)


(324)


2,191


(249)


1,375




Recovery of Provision/(Provision) for Impairment of Investments in Finance Lease


-


-


-


(252)


(252)




(Provision)/Recovery of Provision for Impairment of other Financial Assets


(3,843)


-


6,329


(536)


1,950




Recovery of Impairment/(Impairment) of Investment Securities Available for Sale


-


-


(21)


(161)


(182)




Profit before G&A Expenses and Income Taxes


102,661


42,908


65,035


12,723


223,327




Staff Costs


(30,106)


(10,459)


(6,326)


(3,841)


(50,732)




Depreciation and Amortization


(8,853)


(1,208)


(531)


(400)


(10,992)




Administrative and Other Operating Expenses


(19,093)


(4,831)


(1,580)


(4,862)


(30,366)




Operating Expenses


(58,052)


(16,498)


(8,437)


(9,103)


(92,090)




Profit before Tax


44,609


26,410


56,598


3,620


131,237




Income Tax Expense


(6,061)


(4,094)


(8,437)


(10,207)


(28,799)




Profit for the Year


38,548


22,316


48,161


(6,587)


102,438




 
 




Portfolios by Segments


 


 




In thousands of GEL


30-Jun


31-Mar




Loans and Advances to Customers


 


 




 


 


 




Consumer


1,975,426


1,926,828




Mortgage


2,185,630


2,007,914




Pawn


35,393


34,583




Retail


4,196,449


3,969,325




Corporate


2,581,612


2,489,516




MSME


2,117,886


1,974,075




Total Loans and Advances to Customers (Gross)


8,895,947


8,432,916




Less: Provision for Loan Impairment


(321,367)


(296,096)




Total Loans and Advances to Customers (Net)


8,574,580


8,136,820




 


 


 




Customer Accounts


 


 




 


 


 




Retail


4,467,638


4,197,277




Corporate


2,559,449


2,474,560




MSME


905,498


938,967




Total Customer Accounts


7,932,585


7,610,804




 
Retail Banking
As of 30 June 2018, retail loans stood at GEL 4,196.4 million, up by GEL 227.1 million, or 5.7%, QoQ. As of 30 June 2018, TBC Bank's retail loans accounted for 39.8% market share of total individual loans. As of 30 June 2018, foreign currency loans represented 50.6% of the total retail loan portfolio.
 
In the reporting period, retail deposits stood at GEL 4,467.6 million, up by GEL 270.4 million, or 6.4%, QoQ. Retail deposits accounted for 41.2% market share of total individual deposits. As of 30 June 2018 term deposits accounted for 53.9% of the total retail deposit portfolio, while foreign currency deposits represented 82.5% of the total retail deposit portfolio.
 
In 2Q 2018, retail loan yields and deposit rates stood at 14.7% and 2.7%, respectively. The segment's cost of risk on loans was 2.6% .The retail segment contributed 37.6%, or GEL 38.5 million, to the total net income in 2Q 2018.
Corporate Banking
As of 30 June 2018, corporate loans amounted to GEL 2,581.6 million, up by GEL 92.1 million, or 3.7%, QoQ. Foreign currency loans accounted for 76.7% of the total corporate loan portfolio. The market share of total legal entities loans stood at 36.5%.
 
As of the same date, corporate deposits totalled GEL 2,559.4 million, up by GEL 84.9 million, or 3.4%, QoQ. Foreign currency corporate deposits represented 46.6% of the total corporate deposit portfolio. The market share of total legal entities deposits stood at 37.5%.
 
In 2Q 2018, corporate loan yields and deposit rates stood at 9.4% and 5.2%, respectively. In the same period, the cost of risk on loans was 0.9%. In terms of profitability, the corporate segment's net profit reached GEL 48.2 million, or 47.0%, of the total net income.
 
 
MSME Banking
As of 30 June 2018, MSME loans amounted to GEL 2,117.9, up by GEL 143.8 million, or 7.3%, QoQ. Foreign currency loans accounted for 51.8% of the total MSME portfolio.
 
As of the same date, MSME deposits stood at GEL 905.5 million, down by GEL 33.5 million, or 3.6%, QoQ. Foreign currency MSME deposits represented 49.5% of the total MSME deposit portfolio.
 
In 2Q 2018, MSME loan yields and deposit rates stood at 12.0% and 1.0%, respectively, while the cost of risk on loans was 1.0%. In terms of profitability, net profit for the MSME segment amounted to GEL 22.3 million, or 21.8%, of the total net income.
 
 
Consolidated Financial Statements of TBC Bank Group PLC
 




Consolidated Balance Sheet


 


 




In thousands of GEL 


Jun-18


Mar-18




Cash and cash equivalents


1,605,163


1,245,562




Due from other banks


42,469


23,311




Mandatory cash balances with National Bank of Georgia


1,034,177


978,116




Loans and advances to customers


8,574,580


8,136,820




Investment securities available for sale


817,876


580,784




Bonds carried at amortized cost


477,694


429,875




Investments in associates


1,925


1,585




Investments in finance leases


172,027


145,546




Investment properties


78,094


76,690




Current income tax prepayment


7,369


8,454




Deferred income tax asset


2,331


2,527




Other financial assets


107,741


127,851




Other assets


171,046


160,662




Premises and equipment


374,414


369,610


 




Intangible assets


87,947


84,997




Goodwill


28,657


28,657


 




TOTAL ASSETS    


13,583,510


12,401,047




LIABILITIES     


 


 




Due to Credit Institutions


3,097,602


2,270,119




Customer accounts    


7,932,585


7,610,804




Other financial liabilities   


88,320


90,499




Current income tax liability  


26


44




Debt Securities in issue


19,641


19,371




Deferred income tax liability  


22,980


663




Provisions for liabilities and charges 


11,732


12,467




Other liabilities     


69,364


64,618




Subordinated debt    


397,576


402,058




TOTAL LIABILITIES    


11,639,826


10,470,643




EQUITY     


 


 




Share capital


1,650


1,626




Share premium


796,808


753,298




Retained earnings


1,261,578


1,266,196




Group reorganisation reserve


(162,166)


(162,167)




Share based payment reserve


(21,085)


(24,431)




Revaluation reserve for premises


64,962


70,045




Revaluation reserve for available-for-sale securities


2,541


4,069




Cumulative currency translation reserve


(7,345)


(7,427)




Net assets attributable to owners


1,936,943


1,901,209




Non-controlling interest    


6,741


29,195




TOTAL EQUITY    


1,943,684


1,930,404




TOTAL LIABILITIES AND EQUITY  


13,583,510


12,401,047



 
 
 
 
 



 
  




Consolidated Statement of Profit or Loss and Other Comprehensive Income


 


 


 




In thousands of GEL 


2Q'18


1Q'18


2Q'17




Interest income 


308,152


289,849


249,898




Interest expense


(119,948)


(114,446)


(100,157)




Net interest income


188,204


175,403


149,741




Fee and commission income


58,265


50,834


45,219




Fee and commission expense


(19,103)


(15,914)


(16,478)




Net Fee and Commission Income


39,162


34,920


28,741




Net insurance premiums earned


6,168


4,435


3,884




Net insurance claims incurred and agents' commissions


(2,915)


(2,389)


(2,028)




Insurance Profit


3,253


2,046


1,856




Net income from foreign currency operations  


21,701


17,081


22,246




Net gain/(losses) from foreign exchange translation


1,550


2,473


991




Net gains/(losses) from derivative financial instruments


396


17


(35)




Other operating income


3,812


6,451


3,068




Share of profit of associates


340


308


484




Other operating non-interest income


27,799


26,330


26,754




Provision for loan impairment


(37,982)


(27,998)


(23,444)




Provision for  impairment of investments in finance lease


(252)


(241)


(97)




Provision for/ (recovery of provision)  performance guarantees and credit related commitments


1,375


(3,875)


1,454




Provision for  impairment of other financial assets


1,950


(7,419)


(3,628)




Impairment of investment securities available for sale


(182)


70


-




Operating income after provisions for impairment


223,327


199,236


181,377




Staff costs


(50,732)


(52,115)


(54,838)




Depreciation and amortisation


(10,992)


(10,471)


(8,919)




(Provision for)/ recovery of liabilities and charges


-


-


2,400




Administrative and other operating expenses


(30,366)


(28,346)


(31,573)




Operating expenses


(92,090)


(90,932)


(92,930)




Profit before tax


131,237


108,304


88,447




Income tax expense


(28,799)


(10,779)


(8,590)




Profit for the period


102,438


97,525


79,857




Other Comprehensive income:


 


 


 




Items that may be reclassified subsequently to profit or loss:


 


 


 




Revaluation of available for-sale-investments


(1,547)


2,374


4,022




Exchange differences on translation to presentation currency


81


(67)


(62)




Items that will not be reclassified to profit or loss:


 


 


 




Income tax recorded directly in other comprehensive income


(5,151)


-


(422)




Other comprehensive income for the Period


(6,617)


2,307


3,538




Total comprehensive income for the Period


95,821


99,832


83,395




Profit attributable to:


 


 


 




 - Shareholders of TBCG


102,589


95,758


78,544




 - Non-controlling interest


(151)


1,767


1,313




Profit for the period


102,438


97,525


79,857




Total comprehensive income is attributable to:


 


 


 




 - Shareholders of TBCG


96,060


98,029


82,051




 - Non-controlling interest


(239)


1,803


1,344




Total comprehensive income for the Period


95,821


99,832


83,395




 
 
Key Ratios
Average Balances
The average balances included in this document are calculated as the average of the relevant monthly balances as of each month-end. Balances have been extracted from TBC's unaudited and consolidated management accounts prepared from TBC's accounting records. These were used by the Management for monitoring and control purposes.




   Key Ratios


 


 


 




 


 


 


 




Ratios (based on monthly averages, where applicable)


2Q'18


1Q'18


2Q'17




Underlying ROE1


24.9%


21.0%


20.4%




Reported ROE2


21.3%


21.0%


18.9%




Underlying ROA3


3.7%


3.2%


3.2%




Reported ROA4


3.2%


3.2%


3.0%




Pre-provision ROE5


28.6%


29.6%


25.1%




Cost to Income6


35.6%


38.1%


44.9%




Cost of Risk7


1.8%


1.3%


1.3%




NIM8


7.1%


6.9%


6.8%




Risk Adjusted NIM9


5.5%


5.2%


5.3%




Loan Yields10


12.5%


12.3%


12.4%




Risk Adjusted Loan Yields11


10.8%


10.6%


10.9%




Deposit rates12


3.3%


3.3%


3.5%




Yields on interest Earning Assets13


11.7%


11.5%


11.3%




Cost of Funding14


4.4%


4.4%


4.5%




Spread15


7.3%


7.1%


6.8%




PAR 90 to Gross Loans16


1.1%


1.2%


1.6%




NPLs to Gross Loans17


3.1%


3.1%


3.4%




NPLs coverage18


116.1%


114.6%


84.3%*




NPLs coverage with collateral19


216.1%


225.8%


219.3%*




Provision Level to Gross Loans20


3.6%


3.5%


2.9%*




Related Party Loans to Gross Loans21


0.1%


0.1%


0.1%




Top 10 Borrowers to Total Portfolio22


9.2%


9.4%


9.1%




Top 20 Borrowers to Total Portfolio23


13.2%


13.4%


13.0%




Net Loans to Deposits plus IFI Funding24


89.5%


93.2%


90.6%




Net Stable Funding Ratio25


127.8%


123.5%


128.7%




Liquidity Coverage Ratio26


119.2%


104.6%


106.1%




Leverage27


7.0x


6.4x


6.7x




Regulatory Tier 1 CAR (Basel III)28


13.4%


13.8%


10.8%**




Regulatory Total 1 CAR (Basel III)29


17.0%


17.7%


14.6%**




* Figures per IAS39
** 2Q 2017 figures are given based on previous regulation in accordance with Basel II/III guidelines
 
 
 
 
Ratio definitions
1. Underlying return on average total equity (ROE) equals underlying net income attributable to owners divided by monthly average of total shareholders' equity attributable to the PLC's equity holders for the same period, adjusted for the respective one-off items; Annualised where applicable.
2. Return on average total equity (ROE) equals net income attributable to owners divided by monthly average of total shareholders' equity attributable to the PLC's equity holders for the same period; Annualised where applicable.
3. Underlying return on average total assets (ROA) equals underlying net income of the period divided by monthly average total assets for the same period; Annualised where applicable.
4. Return on average total assets (ROA) equals net income of the period divided by monthly average total assets for the same period. Annualised where applicable.
5. Pre-Provision Return on average total equity (ROE) equals net income attributable to owners excluding all provision charges divided by monthly average of total shareholders 'equity attributable to the PLC's equity holders for the same period.
6. Cost to income ratio equals total operating expenses for the period divided by the total revenue for the same period. (Revenue represents the sum of net interest income, net fee and commission income and other non-interest income).
7. Cost of risk equals provision for loan impairment divided by monthly average gross loans and advances to customers; Annualised where applicable.
8. Net interest margin (NIM) is net interest income divided by monthly average interest-earning assets; Annualised where applicable. Interest-earning assets include investment securities excluding corporate shares, net investment in finance lease, net loans, and amounts due from credit institutions. The latter excludes all items from cash and cash equivalents, excludes EUR mandatory reserves with NBG which currently has negative interest, and includes other earning items from due from banks.
9. Risk Adjusted Net interest margin is NIM minus cost of risk without one-offs and currency effect.
10. Loan yields equal interest income on loans and advances to customers divided by monthly average gross loans and advances to customers; Annualised where applicable.
11. Risk Adjusted Loan yield is loan yield minus cost of risk without one-offs and currency effect.
12. Deposit rates equal interest expense on customer accounts divided by monthly average total customer deposits; Annualised where applicable.
13. Yields on interest earning assets equal total interest income divided by monthly average interest earning assets; Annualised where applicable.
14. Cost of funding equals total interest expense divided by monthly average interest bearing liabilities; Annualised where applicable.
15. Spread equals difference between yields on interest earning assets (including but not limited to yields on loans, securities and due from banks) and cost of funding (including but not limited to cost of deposits, cost on borrowings and due to banks).
16. PAR 90 to gross loans ratio equals loans for which principal or interest repayment is overdue for more than 90 days divided by the gross loan portfolio for the same period.
17. NPLs to gross loans equals loans with 90 days past due on principal or interest payments, and loans with well-defined weakness, regardless of the existence of any past-due amount or of the number of days past due divided by the gross loan portfolio for the same period.
18. NPLs coverage ratio equals total loan loss provision calculated per IFRS 9 divided by the NPL loans.
19. NPLs coverage with collateral ratio equals loan loss provision calculated per IFRS 9 plus total collateral amount of NPL loans (excluding third party guarantees) discounted at 30-50% depending on segment type divided by the NPL loans.
20. Provision level to gross loans equals loan loss provision divided by the gross loan portfolio for the same period.
21. Related party loans to total loans equals related party loans divided by the gross loan portfolio.
22. Top 10 borrowers to total portfolio equals total loan amount of top 10 borrowers divided by the gross loan portfolio.
23. Top 20 borrowers to total portfolio equals total loan amount of top 20 borrowers divided by the gross loan portfolio.
24. Net loans to deposits plus IFI funding ratio equals net loans divided by total deposits plus borrowings received from international financial institutions.
25. Net stable funding ratio equals available amount of stable funding divided by required amount of stable funding as defined in Basel III.
26. Liquidity coverage ratio equals high-quality liquid assets divided by total net cash outflow amount as defined by the NBG.
27. Leverage equals total assets to total equity.
28. Regulatory tier 1 CAR equals tier I capital divided by total risk weighted assets, both calculated in accordance with the pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.
29. Regulatory total CAR equals total capital divided by total risk weighted assets, both calculated in accordance with the pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.
 
 
 
 
Exchange Rates
To calculate the QoQ growth of the Balance Sheet items without the currency exchange rate effect, we used the USD/GEL exchange rate of 2.4144 as of 31 March 2018. For the calculations of the YoY growth without the currency exchange rate effect, we used the USD/GEL exchange rate of 2.4072 as of 30 June 2017. As of 30 June 2018 the USD/GEL exchange rate equalled 2.4516. For P&L items growth calculations without currency effect, we used the average USD/GEL exchange rate for the following periods: 2Q 2018 of 2.4460, 1Q 2018 of 2.4854, 2Q 2017 of 2.4187.
 
 
 
 
Unaudited Consolidated Financial Results Overview for 1H 2018
 
This statement provides a summary of the unaudited business and financial trends for 1H 2018 for TBC Bank Group plc and its subsidiaries. Quarterly financial information and trends are unaudited.
TBC Bank Group PLC financial results are adjusted for certain one-off items, to enable better analysis of the Group's performance. The reconciliation of the underlying profit and loss items with the reported profit and loss items and the underlying ratios are given under annex 20 on pages 47-48.
Starting from 1 January 2018, TBC Bank adopted IFRS 9 and IFRS 15 standards as explained in details in note 2 to consolidated financial statements on pages: 69-75. Therefore, the comparative information for 2017 is not comparable to the information presented for 2018.
Please note, that there might be slight differences in previous periods' figures due to rounding,




 
Income Statement Highlights


 


 


 


 




in thousands of GEL


1H'18


 


1H'17


Change YoY




Net Interest Income


363,607


 


292,074


24.5%




Net Fee and Commission Income


74,082


 


55,217


34.2%




Other Operating Non-Interest Income


59,428


 


63,283


-6.1%




Provisioning Charges


(74,554)


 


(43,374)


71.9%




Operating Income after Provisions for Impairment


422,563


 


367,200


15.1%




Operating Expenses


(183,022)


 


(175,850)


4.1%




Profit Before Tax


239,541


 


191,350


25.2%




Income Tax Expense


(39,578)


 


(14,935)


165.0%




Reported Profit for the Period


199,963


 


176,415


13.3%




Underlying Profit for the Period


217,389


 


184,481


17.8%




 




Balance Sheet and Capital Highlights


 


 


 


 




 


Jun-18


Jun-17


Change YoY




In Millions


GEL


USD


GEL


USD


 




Total Assets


13,584


5,541


11,281


4,686


20.4%




Gross Loans


8,896


3,629


7,386


3,068


20.4%




Customer Deposits


7,933


3,236


6,666


2,769


19.0%




Total Equity


1,944


793


1,691


702


15.0%




Regulatory Tier I Capital (Basel III)*


1,499


611


1,283


533


16.8%




Regulatory Total Capital (Basel III)*


1,908


778


1,733


720


10.1%




Regulatory Risk Weighted Assets (Basel III)*


11,200


4,569


11,866


4,929


-5.6%




*June 2018 figures are given per new NBG regulation, which came into force in December 2017, while June 2017 figures are given based on previous regulation in accordance  with Basel II/III guidelines
 
 




Key Ratios


1H'18


1H'17


Change YoY




Underlying ROE


23.0%


22.5%


0.5%




Reported ROE


21.2%


21.5%


-0.3%




Underlying ROA


3.4%


3.5%


-0.1%




Reported ROA


3.1%


3.3%


-0.2%




Cost to Income


36.8%


42.8%


-6.0%




Cost of Risk


1.6%


1.1%


0.5%




FX adjusted Cost of Risk


1.7%


1.5%


0.2%




NPL to Gross Loans


3.1%


3.4%


-0.3%




Regulatory Tier 1 CAR (Basel III)*


13.4%


10.8%


2.6%




Regulatory Total CAR (Basel III)*


17.0%


14.6%


2.4%




Leverage (Times)


7.0x


6.7x


0.3x




*June 2018 figures are given per new NBG regulation, which came into force in December 2017, while June 2017 figures are given based on previous regulation in accordance with Basel II/III guidelines
 
 
Income Statement Discussion




Net Interest Income


 


 


 




In thousands of GEL


1H'18


1H'17


Change in %




Loans and Advances to Customers


526,431


438,753


20.0%




Investment Securities Available for Sale


25,135


19,088


31.7%




Due from Other Banks


11,946


4,909


143.4%




Bonds Carried at Amortized Cost


17,879


15,250


17.2%




Investment in Leases


16,610


9,667


71.8%




Interest Income


598,001


487,667


22.6%




Customer Accounts


127,727


108,412


17.8%




Due to Credit Institutions


86,262


68,952


25.1%




Subordinated Debt


19,599


17,187


14.0%




Debt Securities in Issue


806


1,042


-22.6%




Interest Expense


234,394


195,593


19.8%




Net Interest Income


363,607


292,074


24.5%




 


 


 


 




Net Interest Margin


7.0%


6.7%


0.3%




1H 2018 to 1H 2017 Comparison
 In 1H 2018, net interest income grew by GEL 71.5 million, or 24.5%, YoY to GEL 363.6 million, resulting from a GEL 110.3 million, or 22.6%, higher interest income and a GEL 38.8 million or 19.8% higher interest expense.
Interest income grew by GEL 110.3 million, or 22.6%, YoY to GEL 598.0 million, mainly driven by an increase in interest income from loans and advances to customers of GEL 87.7 million, or 20.0%, which is primarily related to an increase in the gross loan portfolio by GEL 1,510 million, or 20.4%, YoY. This effect was further magnified by a 0.3pp increase in loan yields, which stood at 12.4%, driven by an increase in rates on GEL denominated loans of 1.1pp that offset the decrease in yields on FC denominated loans by 0.9pp. Another contributor to the increase in interest income was amounts due from credit institutions, which were up by GEL 7.0 million related to the increased balance of GEL 84.9 million, or 10.0%, as well as a rise in respective yield of 1.2pp to 2.7% as of 1H 2018. The growth in interest income also resulted from higher interest income from investment in leases by GEL 6.9 million, or 71.8%, resulting from a significant increase in the size of such receivables by GEL 75.7 million, or 78.6%, and magnified by an increase in the respective yield of 1.0pp, up to 21.9%.  Yields on interest earning assets expanded by 0.5pp to 11.6%, compared to 1H 2017.
The YoY growth in interest expense by GEL 38.8 million or 19.8% to a GEL 234.4 million in 1H 2018 was mainly due to 17.8% increase in interest expense on customer accounts by GEL 19.3 million and increase in interest expense on amounts due to credit institutions by GEL 17.3 million or 25.1%. The increase in interest expense on customer accounts was attributable to a GEL 1,267 million, or 19.0%, growth in the respective portfolio, partially offset by a 0.1pp decrease in the cost of deposit down to 3.3%, which was explained by a 0.4pp decrease in cost of deposits of FC denominated deposits. Another contributor to the increase in interest expense was amounts due to credit institutions, up by GEL 784.1 million, or 33.9%, and a 0.6pp higher effective rate on the respective portfolio, which stood at stood at 6.8%. The cost of funding remained stable on a YoY basis at 4.4%.
Consequently, NIM was 7.0% in 1H 2018, compared to 6.7% in 1H 2017.




 
Fee and Commission Income


 


 




In thousands of GEL


1H'18


1H'17


Change in %




Card Operations


47,010


40,245


16.8%




Settlement Transactions


33,693


28,159


19.7%




Guarantees Issued


9,079


6,073


49.5%




Issuance of Letters of Credit


2,360


3,459


-31.8%




Cash Transactions


8,988


7,470


20.3%




Foreign Currency Exchange Transactions


896


582


54.0%




Other


7,073


3,731


89.6%




Fee and Commission Income


109,099


89,719


21.6%




Card Operations


23,443


24,005


-2.3%




Settlement Transactions


4,285


3,385


26.6%




Guarantees Issued


620


561


10.5%




Letters of Credit


588


465


26.5%




Cash Transactions


2,359


2,105


12.1%




Foreign Currency Exchange Transactions


5


89


-94.4%




Other


3,717


3,892


-4.5%




Fee and Commission Expense


35,017


34,502


1.5%




Card Operations


23,567


16,240


45.1%




Settlement Transactions


29,408


24,774


18.7%




Guarantees


8,459


5,512


53.5%




Letters of Credit


1,772


2,994


-40.8%




Cash Transactions


6,629


5,365


23.6%




Foreign Currency Exchange Transactions


891


493


80.7%




Other


3,356


(161)


NMF




Net Fee And Commission Income


74,082


55,217


34.2%




NMF - no meaningful figures
 
1H 2018 to 1H 2017 Comparison
In 1H 2018, net fee and commission income totalled GEL 74.1 million, up by GEL 18.9 million, or 34.2%, compared to 1H 2017. This mainly resulted from the following sources: an increase in net fee and commission income from card operations of GEL 7.3 million, or 45.1%; an increase in net fee and commission income from settlement transactions of GEL 4.6 million, or 18.7%; and an increase in net fee and commission income from guarantees received of GEL 2.9 million or 53.5%. In 1H 2018 other net fee and commission income increased by GEL 3.5 million partially due to the arrangement fee of GEL1.3 million related to one corporate client.
 
The rise in net fee and commission income from card operations is related to the increased number of active cards and POS terminals by 25% and 11% respectively.  The increase in net fee and commission income from settlement transactions was mainly related to our subsidiary, TBC Pay, driven by increased number of transactions and the growth in net fee and commission income from our affluent retail sub-segment, TBC Status.
 




Other Operating Non-Interest Income and Gross Insurance Profit


 


 




In thousands of GEL


1H'18


1H'17


Change in %




Net income from Foreign Currency Operations


42,805


45,429


-5.8%




Share of Profit of Associates


648


577


12.3%




Gains Less Losses/(Losses Less Gains) from Derivative Financial Instruments


413


(38)


NMF




Revenues from Cash-In Terminal Services


1,253


597


109.9%




Revenues from Operational Leasing


3,142


3,510


-10.5%




Gain from Sale of Investment Properties


1,896


1,174


61.5%




Gain from Sale of Inventories of Repossessed Collateral


205


945


-78.3%




Revenues from Non-Credit Related Fines


254


96


164.6%




Gain on Disposal of Premises and Equipment


199


191


4.2%




Other


3,314


7,721


-57.1%




Other Operating Income


10,263


14,234


-27.9%




Gross Insurance Profit[9]


5,299


3,081


72.0%




Other Operating Non-Interest Income and Gross Insurance Profit


59,428


63,283


-6.1%




NMF - no meaningful figures
 


 


 


 




 
1H 2018 to 1H 2017 Comparison
Total other operating non-interest income and gross insurance profit fell by GEL 3.9 million, or 6.1%, to GEL 59.4 million in 1H 2018. This decrease primarily resulted from the decrease in other operation income by GEL 4.0 million, or 27.9% and decrease in net income from foreign currency operations by GEL 2.6 million or 5.8%. The decrease in net income from foreign currency operations is mainly due decline of foreign exchange margins, which is caused by less volatility on the local foreign exchange market partially offset by increase in the volume of foreign exchange transactions in 1H 2018,  as well as due to one-off transactions executed in 1H 2017 related to one large corporate loan issuances and  NBG larization program initiatives. This was partially           offset by an increase in gross insurance profit by GEL 2.2 million.
 
The increase in gross insurance profit was related to the sharp increase in the number of customers by around 122,000, which in turn led to a high increase in gross written premium by 157% YoY on a stand-alone basis. As a result, according to internal estimates, P&C market share reached 17.9%. More information about TBC insurance can be found in annex 19 on page 46.
 




Provision for Impairment
 


 


 


 




In thousands of GEL


1H'18


1H'17


Change in %




Provision for Loan Impairment


(65,980)


(40,367)


63.5%




Provision for Impairment of Investments in Finance Lease


(493)


(129)


NMF




Provision for/(Recovery of Provision) Performance Guarantees and Credit Related Commitments


(2,500)


1,547


NMF




Provision for Impairment of Other Financial Assets


(5,469)


(4,425)


23.6%




Impairment of Investment Securities Available for Sale


(112)


-


NMF




Total Provision Charges for Impairment


(74,554)


(43,374)


71.9%




Operating Income after Provisions for Impairment


422,563


367,200


15.1%




 


 


 


 




Cost of Risk


1.6%


1.1%


0.5%




NMF - no meaningful figures
 
 


 


 


 




1H 2018 to 1H 2017 Comparison
In 1H 2018, total provision charges increased by GEL 31.2 million to GEL 74.6 million, compared to 1H 2017. Out of the total GEL 31.2 million, GEL 25.6 million was attributable to loans. Increased provision charges for loans were driven by corporate segment due to a high recovery of provisions in 1H 2017.
 




Operating Expenses


 


 


 




In thousands of GEL


1H'18


1H'17


Change in %




Staff Costs


102,847


102,376


0.5%




Provisions for Liabilities and Charges


-


(2,495)


-100.0%




Depreciation and Amortization


21,463


17,523


22.5%




Professional services


4,459


5,825


-23.5%




Advertising and marketing services


11,644


6,797


71.3%




Rent


11,707


11,589


1.0%




Utility services


3,188


3,020


5.6%




Intangible asset enhancement


5,066


4,781


6.0%




Taxes other than on income


3,603


2,812


28.1%




Communications and supply


2,193


1,802


21.7%




Stationary and other office expenses


2,507


2,240


11.9%




Insurance


968


1,976


-51.0%




Security services


1,002


999


0.3%




Premises and equipment maintenance


2,163


2,697


-19.8%




Business trip expenses


989


907


9.0%




Transportation and vehicles maintenance


792


798


-0.8%




Charity


561


417


34.5%




Personnel training and recruitment


409


727


-43.7%




Write-down of current assets to fair value less costs to sell


(570)


(183)


NMF




Loss on disposal of Inventory


100


1,186


-91.6%




Loss on disposal of investment properties


60


385


-84.4%




Loss on disposal of premises and equipment


336


171


96.5%




Impairment of intangible assets


-


1,850


-100.0%




Gross Change in IBNR


-


391


-100.0%




Other


7,535


7,259


3.8%




Administrative and Other Operating Expenses


58,712


58,446


0.5%




Operating Expenses


183,022


175,850


4.1%




Profit before Tax


239,541


191,350


25.2%




Income Tax Expense


(39,578)


(14,935)


165.0%




Profit for the Period


199,963


176,415


13.3%




 


 


 


 




Cost to Income


36.8%


42.8%


-6.0%




ROE


21.2%


21.5%


-0.3%




ROA


3.1%


3.3%


-0.2%




NMF - no meaningful figures
 


 


 


 




 
1H 2018 to 1H 2017 Comparison
In 1H 2018, total operating expenses increased by GEL 7.2 million, or 4.1%, YoY, primarily due to an increase in depreciation and amortisation of GEL 3.9 million, or 22.5%, which was mainly driven by the increased average balance of intangible assets in 1H 2018 by GEL 21.8 million, or 34.4%, and by the reversal of provisions for liabilities and charges related to the recovery of tax provisions in 1H 2017 in the amount of GEL 2.4 million.
 
Staff costs have increased by GEL 0.5 million or 0.5%. Higher staff costs in 1H 2017 were related to the one-off cost related to Bank Republic integration in the amount of GEL 3.1 million.  Without this one-off cost, the growth would have been 3.6%, related to the increased scale of business.
 
Administrative expenses have increased slightly by GEL 0.3 million or by 0.5%. In 1H 2017 TBC incurred GEL 6.4 million in administrative and other operating expenses related to the integration of Bank Republic. Without this one-off cost, the growth would have been 12.8%, mainly driven by increased advertising costs in the amount of GEL 4.8 million or 71.3%.
 
As a result, the reported cost to income ratio was 36.8% in 1H 2018, 6.0pp lower than the 42.8% in 1H 2017. Underlying cost to income was 3.7% lower than the underlying 40.5% in 1H 2017.
 
Income Tax[10]
In 1H 2018, TBC Bank reversed the one-off deferred tax gain recognized in 2016 due to the recent amendment to the Georgian Tax Code in relation to corporate income tax. The amendment, which came into force on 12 June 2018, postponed tax relief for re-invested profit from 1 January 2019 to 1 January 2023 for financial institutions. This reversal has resulted in a GEL 17.4 million expense on the profit and loss statement and a GEL 5.1 million reduction in equity in 2Q 2018.
 
 
Net Income
Reported net income for 1H increased by GEL 23.5 million, or 13.3%, YoY and stood at GEL 200.0 million, while underlying net income increased by GEL 32.9 million or 17.8% YoY and amounted to GEL 217.4 million.
As a result, underlying ROE stood at 23.0%, up by 0.5pp YoY, while underlying ROA stood at 3.4%, down by 0.1pp YoY. Reported ROE stood at 21.2%, down by 0.3pp YoY, and reported ROA stood at 3.1%, down by 0.2pp YoY.
 
 
 




Balance Sheet Discussion


 


 


 




In millions of GEL


Jun-18


Jun-17


Change YoY




Cash, Due from Banks and Mandatory Cash Balances with NBG


2,682


2,192


22.4%




Loans and Advances to Customers (Net)


8,575


7,174


19.5%




Financial Securities


1,296


1,007


28.7%




Fixed and Intangible Assets & Investment Property


540


479


12.7%




Other Assets


491


429


14.5%




Total Assets


13,584


11,281


20.4%




Due to Credit Institutions


3,098


2,314


33.9%




Customer Accounts


7,933


6,666


19.0%




Debt Securities in Issue


20


24


-16.7%




Subordinated Debt


398


390


2.1%




Other Liabilities


191


196


-2.6%




Total Liabilities


11,640


9,590


21.4%




Total Equity


1,944


1,691


15.0%




 
Assets
As of 30 June 2018, the Group's total assets amounted to GEL 13,584 million, up by GEL 2,303 million, or 20.4%, YoY. The increase was mainly due to a rise in net loans to customers of GEL 1,401 million, or by 19.5%, YoY. The YoY increase in total assets also resulted from a GEL 490 million, or 22.4%, rise in liquid assets (comprising cash, due from banks and mandatory cash balances with NBG) and a GEL 289 million, or 28.7%, increase in financial securities, compared to 30 June 2017.
 
As of 30 June 2018, the gross loan portfolio reached GEL 8,896 million, up by 20.4% YoY. At the same time, gross loans denominated in foreign currency accounted for 58.5% of total loans, compared to 60.8% as of 30 June 2017.
 
Asset Quality




PAR 30 by Segments and Currencies


 


 


 


 


 


 




 


 


 


 


 


 


 




Par 30


Jun-18


Jun-17




 


GEL


FC


Total


GEL


FC


Total




Corporate


0.0%


0.4%


0.3%


0.4%


1.6%


1.3%




Retail


3.7%


1.8%


2.7%


3.1%


2.2%


2.7%




MSME


1.6%


3.7%


2.7%


2.3%


3.9%


3.4%




Total


2.5%


1.7%


2.0%


2.5%


2.4%


2.4%




loans overdue by more than 30 days to gross loans


 


 


 


 


 


 




 
Total
The total PAR 30 has declined by 0.4pp YoY. The YoY decrease is related to the improvements across the corporate and MSME segments by 1.0% and 0.7% respectively.
 
Retail Segment
The retail segment's PAR 30 amounted to 2.7% and remained flat on a YoY basis.
 
Corporate
The corporate segment's PAR 30 decreased by 1.0pp YoY. The decrease is mainly driven by high recoveries of overdue amounts.
 
MSME
The MSME segment's PAR 30 decreased by 0.7pp YoY.  YoY decrease was driven by the improved performance of both micro and SME portfolios.
 
 




NPLs


 


 


 


 


 


 




 


 


 


 


 


 


 




NPLs


Jun-18


Jun-17




 


GEL


FC


Total


GEL


FC


Total




Corporate


1.5%


3.2%


2.8%


0.3%


5.0%


3.8%




Retail


2.8%


2.9%


2.9%


2.4%


3.0%


2.7%




MSME


2.2%


5.7%


4.0%


2.0%


5.9%


4.6%




Total


2.4%


3.6%


3.1%


1.9%


4.4%


3.4%




 
Total
Total NPLs stood at 3.1%, down by 0.3pp on YoY basis, mainly driven by the improved performance of the corporate and MSME loan books.
 
Retail Segment
The retail segment's NPLs stood at 2.9%, up by 0.2pp YoY. The increase was mainly driven by credit cards and high yield products as anticipated and provisioned appropriately at disbursement.
 
Corporate
The corporate NPLs stood at 2.8%, down by 1.0pp on YoY basis, due to overall improved performance of the corporate loan book.
 
MSME
The MSME NPLs declined by 0.6pp on a YoY basis, and stood at 4.0%, driven by a decrease in NPLs in both the micro and SME portfolios.
 
 




NPLs Coverage


 


 


 


 




 


 


 


 


 




NPLs Coverage


Jun-18


Jun-17




 


Exc. Collateral


Incl. Collateral


Exc. Collateral


Incl. Collateral




Corporate


99.2%


232.1%


59.7%


273.0%




Retail


153.9%


226.8%


126.8%


211.5%




MSME


76.9%


187.6%


53.6%


174.9%




Total


116.1%


216.1%


84.3%


219.3%




 
NPLs Coverage
Total provision coverage increased from 84.3% to 116.1%. The key driver of the increase was the transition to the IFRS 9 methodology, which led to an increase in loan loss provision across all segments.  Apart from the IFRS 9 effect, in the case of the MSME segment, the increase in provision coverage was driven by the re-segmentation effect made in 1Q 2018.
 
Liabilities
As of 30 June 2018, TBC Bank's total liabilities amounted to GEL 11,640 million, up by GEL 2,049.5 million, or 21.4% YoY. The increase was primarily due to a GEL 784.1 million, or 33.9%, increase in amounts due to credit institutions and an increase in customer accounts of GEL 1,266.2 million, or 19.0%. Total liabilities also grew due to an increase in deferred income tax liability of GEL 20.8 million, which was mainly related to the reversal of the deferred tax gain, as mentioned above. 
 
Liquidity
As of 30 June 2018, the Bank's liquidity ratio, as defined by the NBG, stood at 33.3%, compared to 34.2% as of 30 June 2017. As of 30 June 2018, the total liquidity coverage ratio (LCR), as defined by the NBG, was 119.2%, above the 100.0% limit, while the LCR in GEL and FC stood at 105.0% and 129.0% respectively, above the respective limits of 75% and 100%.
 
Total Equity
As of 30 June 2018, TBC's total equity amounted to GEL 1,943.7 million, up by GEL 253.2 million or by 15.0% from GEL 1,690.5 million as of 30 June 2017. This YoY change in equity was mainly due to net profit contribution of GEL 383.6 million during the last 12 months, which was mostly offset by dividend distribution of GEL 88.9 million in May 2018 and by IFRS 9 transition effect in the amount of GEL 64 million as of 1 January 2018.
 
Regulatory Capital
According to the newly introduced methodology, as of 30 June 2018 the Bank's Basel III Tier 1 and Total Capital Adequacy Ratios (CAR) stood at 13.4% and 17.0%, respectively, compared to the minimum required levels of 10.2% and 15.6%.
 
In 30 June 2018, The Bank's Basel III Tier 1 Capital amounted to GEL 1,498.9 million. The Bank's Basel III Total Capital amounted to GEL 1,908.4 million. Risk Weighted Assets amounted to GEL 11,200.4 million as of 30 June 2018.
 
Results by Segments and Subsidiaries
The segment definitions are as follows (updated in 2018):
·      Corporate - a legal entity/group of affiliated entities with an annual revenue exceeding GEL 12.0 million, or which have been granted facilities of more than GEL 5 million. Some other business customers may also be assigned to the corporate segment or transferred to MSME on a discretionary basis;
·      MSME (Micro, Small and Medium) - business customers who are not included in either the corporate or the retail segments; or legal entities who have been granted a pawn shop loan; or individual customers of the newly launched, fully digital bank-Space;
·      Retail - non-business individual customers or individual business customers who have been granted mortgage loans; all individual customers are included in retail deposits;
·      Corporate Centre - comprises the Treasury, other support and back office functions, and the non-banking subsidiaries of the Group;
Business customers are all legal entities or individuals who have been granted a loan for business purpose.
Summary of key changes:
·      The limits for corporate customers have been increased from GEL 8.0 million to GEL 12.0 million for annual revenue and from USD 1.5 million to GEL 5.0 million for granted facilities. Additionally as allowed by policy, some customers were moved to corporate segment on discretionary basis considering practical aspects of client account servicing and administration. As a result, the increase amounted to GEL 66 million and GEL 78 million for corporate loan portfolio and corporate deposit portfolio, respectively.
·      Certain sub-categories for the individual business customers that are granted non mortgage loans have been moved from retail to MSME segment.  Subsequently, GEL 236 million was transferred from retail to MSME loan portfolio.




Income Statement by Segments


 


 


 


 


 




 


 


 


 


 


 




1H'18


Retail


MSME


Corporate


Corp.Centre


Total




Interest Income


299,007


112,534


117,838


68,622


598,001




Interest Expense


(58,951)


(4,917)


(63,859)


(106,667)


(234,394)




Net Transfer Pricing


(42,704)


(37,998)


16,168


64,534


-




Net Interest Income


197,352


69,619


70,147


26,489


363,607




Fee and Commission Income


78,330


10,621


18,399


1,749


109,099




Fee and Commission Expense


(28,407)


(3,209)


(3,260)


(141)


(35,017)




Net fee and Commission Income


49,923


7,412


15,139


1,608


74,082




Gross Insurance Profit


-


-


-


5,299


5,299




Net income from foreign currency operations


11,879


10,030


19,816


(2,943)


38,782




Foreign Exchange Translation Gains Less Losses/(Losses Less Gains)


-


-


-


4,023


4,023




Net Losses from Derivative Financial Instruments


-


-


-


413


413




Other Operating Income


4,679


365


4,576


643


10,263




Share of profit of associates


-


-


-


648


648




Other Operating Non-Interest Income


16,558


10,395


24,392


8,083


59,428




Provision for Loan Impairment


(54,872)


(9,772)


(1,336)


-


(65,980)




(Provision)/Recovery of Provision for Liabilities, Charges and Credit Related Commitments


(95)


(40)


(1,879)


(486)


(2,500)




Recovery of Provision/(Provision) for Impairment of Investments in Finance Lease


-


-


-


(493)


(493)




(Provision)/Recovery of Provision for Impairment of other Financial Assets


(3,843)


(2)


(697)


(927)


(5,469)




Recovery of Impairment/(Impairment) of Investment Securities Available for Sale


-


-


(31)


(81)


(112)




Profit before G&A Expenses and Income Taxes


205,023


77,612


105,735


34,193


422,563




Staff Costs


(62,795)


(19,530)


(13,370)


(7,152)


(102,847)




Depreciation and Amortization


(17,373)


(2,342)


(1,038)


(710)


(21,463)




Administrative and Other Operating Expenses


(39,431)


(8,271)


(3,596)


(7,414)


(58,712)




Operating Expenses


(119,599)


(30,143)


(18,004)


(15,276)


(183,022)




Profit before Tax


85,424


47,469


87,731


18,917


239,541




Income Tax Expense


(11,460)


(7,308)


(13,304)


(7,506)


(39,578)




Profit for the Year


73,964


40,161


74,427


11,411


199,963




 




Portfolios by Segments


 


 




In thousands of GEL


30-Jun-2018


30-Jun-2017




Loans and Advances to Customers


 


 




 


 


 




Consumer


1,975,426


1,919,788




Mortgage


2,185,630


1,744,421




Pawn


35,393


35,648




Retail


4,196,449


3,699,857




Corporate


2,581,612


2,057,644




MSME


2,117,886


1,628,934




Total Loans and Advances to Customers (Gross)


8,895,947


7,386,435




Less: Provision for Loan Impairment


(321,367)


(212,130)




Total Loans and Advances to Customers (Net)


8,574,580


7,174,305




 


 


 




Customer Accounts


 


 




 


 


 




Retail


4,467,638


3,707,854




Corporate


2,559,449


2,057,651




MSME


905,498


900,908




Total Customer Accounts


7,932,585


6,666,413




 
Retail Banking
As of 30 June 2018, retail loans stood at GEL 4,196.4 million, up by GEL 496.6 million, or 13.4%, YoY. As of 30 June 2018, TBC Bank's retail loans accounted for 39.8% market share of total individual loans. As of 30 June 2018, foreign currency loans represented 50.6% of the total retail loan portfolio.
 
In the reporting period, retail deposits stood at GEL 4,467.6 million, up by GEL 759.8 million, or 20.5%, YoY. Retail deposits accounted for 41.2% market share of total individual deposits. As of 30 June 2018, term deposits accounted for 53.9% of the total retail deposit portfolio, while foreign currency deposits represented 82.5% of the total retail deposit portfolio.
 
In 1H 2018, retail loan yields and deposit rates stood at 14.6% and 2.7%, respectively. The segment's cost of risk on loans was 2.7% .The retail segment contributed 37.0%, or GEL 74.0 million, to the total net income in 1H 2018.
Corporate Banking
As of 30 June 2018, corporate loans amounted to GEL 2,581.6 million, up by GEL 524.0 million, or 25.5%, YoY. Foreign currency loans accounted for 76.7% of the total corporate loan portfolio. The market share of total legal entities loans stood at 36.5%.
 
As of the same date, corporate deposits totalled GEL 2,559.4 million, up by GEL 501.8 million, or 24.4%, YoY. Foreign currency corporate deposits represented 46.6% of the total corporate deposit portfolio. The market share of total legal entities deposits stood at 37.5%.
 
In 1H 2018, corporate loan yields and deposit rates stood at 9.3% and 5.2%, respectively. In the same period, the cost of risk on loans was 0.1%. In terms of profitability, the corporate segment's net profit reached GEL 74.4 million, or 37.2% of the  total net income.
 
MSME Banking
As of 30 June 2018, MSME loans amounted to GEL 2,117.9, up by GEL 489.0 million, or 30.0%, YoY. Foreign currency loans accounted for 51.8% of the total MSME portfolio.
 
As of the same date, MSME deposits stood at GEL 905.5 million, up by GEL 4.6 million, or 0.5%, YoY. Foreign currency MSME deposits represented 49.5% of the total MSME deposit portfolio.
 
In 1H 2018, MSME loan yields and deposit rates stood at 11.7% and 1.0%, respectively, while the cost of risk on loans was 1.0%. In terms of profitability, net profit for the MSME segment amounted to GEL 40.2 million, or 20.1%, of the total net income.
 
 
Consolidated Financial Statements of TBC Bank Group PLC
 




Consolidated Balance Sheet


 


 


 




In thousands of GEL 


Jun-18


Jun-17


 




Cash and cash equivalents


1,605,163


1,219,108


 




Due from other banks


42,469


41,096


 




Mandatory cash balances with National Bank of Georgia


1,034,177


931,654


 




Loans and advances to customers


8,574,580


7,174,305


 




Investment securities available for sale


817,876


618,044


 




Bonds carried at amortized cost


477,694


389,036


 




Investments in associates


1,925


1,021


 




Investments in finance leases


172,027


96,329


 




Investment properties


78,094


93,502


 




Current income tax prepayment


7,369


7,719


 




Deferred income tax asset


2,331


3,407


 




Other financial assets


107,741


94,238


 




Other assets


171,046


197,533


 




Premises and equipment


374,414


320,139


 




Intangible assets


87,947


65,034


 




Goodwill


28,657


28,657


 




TOTAL ASSETS    


13,583,510


11,280,822


 




LIABILITIES     


 


 


 




Due to Credit Institutions


3,097,602


2,313,550


 




Customer accounts    


7,932,585


6,666,413


 




Other financial liabilities   


88,320


122,019


 




Current income tax liability  


26


272


 




Debt Securities in issue


19,641


24,106


 




Deferred income tax liability  


22,980


2,138


 




Provisions for liabilities and charges 


11,732


10,733


 




Other liabilities    


69,364


61,013


 




Subordinated debt    


397,576


390,070


 




TOTAL LIABILITIES    


11,639,826


9,590,314


 




EQUITY     


 


 


 




Share capital


1,650


1,601


 




Share premium


796,808


706,580


 




Retained earnings


1,261,578


1,051,973


 




Group reorganisation reserve


(162,166)


(162,166)


 




Share based payment reserve


(21,085)


4,753


 




Revaluation reserve for premises


64,962


70,045


 




Revaluation reserve for available-for-sale securities


2,541


(1,106)


 




Cumulative currency translation reserve


(7,345)


(7,694)


 




Net assets attributable to owners


1,936,943


1,663,986


 




Non-controlling interest    


6,741


26,522


 




TOTAL EQUITY    


1,943,684


1,690,508


 




TOTAL LIABILITIES AND EQUITY  


13,583,510


11,280,822


 




 
 

 
 
 



 




Consolidated Statement of Profit or Loss and Other Comprehensive Income

 
 



In thousands of GEL 


1H'18


1H'17




Interest income 


598,001


487,667




Interest expense


(234,394)


(195,593)




Net interest income


363,607


292,074




Fee and commission income


109,099


89,719




Fee and commission expense


(35,017)


(34,502)




Net Fee and Commission Income


74,082


55,217




Net insurance premiums earned


 10,602


6,382




Net insurance claims incurred and agents’ commissions


 (5,303)


(3,301)




Insurance Profit


5,299


3,081




Net income from foreign currency operations


38,782


43,392




Net gain/(losses) from foreign exchange translation


4,023


2,037




Net gains/(losses) from derivative financial instruments


413


(38)




Other operating income


10,263


14,234




Share of profit of associates


648


577




Other operating non-interest income


54,129


60,202




Provision for loan impairment


(65,980)


(40,367)




Provision for  impairment of investments in finance lease


(493)


(129)




Provision for/ (recovery of provision)  performance guarantees and credit related commitments


(2,500)


1,547




Provision for  impairment of other financial assets


(5,469)


(4,425)




Impairment of investment securities available for sale


(112)


-




Operating income after provisions for impairment


422,563


367,200




Staff costs


(102,847)


(102,376)




Depreciation and amortisation


(21,463)


(17,523)




(Provision for)/ recovery of liabilities and charges


-


2,495




Administrative and other operating expenses


(58,712)


(58,446)




Operating expenses


(183,022)


(175,850)




Profit before tax


239,541


191,350




Income tax expense


(39,578)


(14,935)




Profit for the period


199,963


176,415




Other Comprehensive income:


 


 




Items that may be reclassified subsequently to profit or loss:


 


 




Revaluation of available for-sale-investments


827


2,613




Exchange differences on translation to presentation currency


14


(158)




Items that will not be reclassified to profit or loss:


 


 




Income tax recorded directly in other comprehensive income


(5,151)


(422)




Other comprehensive income for the Period


(4,310)


2,033




Total comprehensive income for the Period


195,653


178,448




Profit attributable to:


 


 




 - Shareholders of TBCG


198,347


173,519




 - Non-controlling interest


1,616


2,896




Profit for the period


199,963


176,415




Total comprehensive income is attributable to:


 


 




 - Shareholders of TBCG


194,089


175,523




 - Non-controlling interest


1,564


2,925




Total comprehensive income for the Period


195,653


178,448




 




Consolidated Statements of Cash Flows

 
 



In thousands of GEL


30-June-18


30-June-17




Cash flows from/(used in) operating activities

 
 



Interest received


           573,644


           468,391




Interest paid


          (234,845)


         (195,640)




Fees and commissions received


           118,805


             89,329




Fees and commissions paid


            (35,025)


           (34,802)




Insurance premium received


             10,973


               7,153




Insurance claims paid


              (5,898)


             (3,497)




Income received from trading in foreign currencies


             38,782


             43,392




Other operating income received


              (2,672)


               8,334




Staff costs paid


          (111,715)


         (102,975)




Administrative and other operating expenses paid


            (59,836)


           (53,075)




Income tax paid


            (10,151)


           (21,785)




Cash flows from operating activities before changes in operating assets and liabilities


           282,062


          204,825




Net change in operating assets


 


 




Due from other banks and mandatory cash balances with the National Bank of Georgia


            (51,957)


               3,043




Loans and advances to customers


          (671,825)


         (499,822)




Investment in finance lease


            (34,101)


             (8,531)




Other financial assets


             40,231


               1,007




Other assets


                 (879)


               1,103




Net change in operating liabilities


 


 




Due to other banks


           126,870


         (223,686)




Customer accounts


           430,568


           610,920




Other financial liabilities


              (10,995)


             (8,600)




Other liabilities and provision for liabilities and charges


                 (215)


                (211)




Net cash from operating activities


           109,759


            80,048




Cash flows from/(used in) investing activities


 


 




Acquisition of investment securities available for sale


          (395,898)


         (401,304)




Proceeds from redemption at maturity of investment securities available for sale


           239,593


           218,981




Acquisition of bonds carried at amortised cost


          (166,188)


         (141,849)




Proceeds from redemption of bonds carried at amortised cost


           142,432


           131,693




Acquisition of premises, equipment and intangible assets


            (34,241)


           (32,262)




Disposal of premises, equipment and intangible assets


               1,015


               1,506




Proceeds from disposal of investment property


               6,898


               2,570




Acquisition of subsidiaries, net of cash acquired


                     -  


                (350)




Net cash used in investing activities


         (206,389)


        (221,015)




Cash flows from/(used in) financing activities


 


 




Proceeds from other borrowed funds


        1,468,097


        1,019,147




Redemption of other borrowed funds


       (1,044,435)


         (640,409)




Proceeds from subordinated debt


 -


             52,990




Redemption of subordinated debt


              (7,688)


 -   




Proceeds from debt securities in issue


                    28


               2,823




Dividends paid


            (85,484)


             (1,193)




Issue of ordinary shares


 -


                    31




Net cash flows from financing activities


           330,518


          433,389




Effect of exchange rate changes on cash and cash equivalents


           (60,202)


          (18,494)




Net increase in cash and cash equivalents


           173,686


          273,928




Cash and cash equivalents at the beginning of the year


        1,431,477


          945,180




Cash and cash equivalents at the end of the year


        1,605,163


       1,219,108




 
 
Key Ratios
Average Balances
The average balances included in this document are calculated as the average of the relevant monthly balances as of each month-end. Balances have been extracted from TBC's unaudited and consolidated management accounts prepared from TBC's accounting records. These were used by the Management for monitoring and control purposes.




Key Ratios


 


 




 


 


 




Ratios (based on monthly averages, where applicable)


1H'18


1H'17




Underlying ROE1


23.0%


22.5%




Reported ROE2


21.2%


21.5%




Underlying ROA3


3.4%


3.5%




Reported ROA4


3.1%


3.3%




Pre-provision ROE5


29.1%


26.9%




Cost to Income6


36.8%


42.8%




Cost of Risk7


1.6%


1.1%




NIM8


7.0%


6.7%




Risk Adjusted NIM9


5.3%


5.2%




Loan Yields10


12.4%


12.1%




Risk Adjusted Loan Yields11


10.7%


10.6%




Deposit rates12


3.3%


3.4%




Yields on interest Earning Assets13


11.6%


11.1%




Cost of Funding14


4.4%


4.4%




Spread15


7.1%


6.7%




PAR 90 to Gross Loans16


1.1%


1.6%




NPLs to Gross Loans17


3.1%


3.4%




NPLs coverage18


116.1%


84.3%*




NPLs coverage with collateral19


216.1%


219.3%*




Provision Level to Gross Loans20


3.6%


2.9%*




Related Party Loans to Gross Loans21


0.1%


0.1%




Top 10 Borrowers to Total Portfolio22


9.2%


9.1%




Top 20 Borrowers to Total Portfolio23


13.2%


13.0%




Net Loans to Deposits plus IFI Funding24


89.5%


90.6%




Net Stable Funding Ratio25


127.8%


128.7%




Liquidity Coverage Ratio26


119.2%


106.1%




Leverage27


7.0x


6.7x




Regulatory Tier 1 CAR (Basel III)28


13.4%


10.8%**




Regulatory Total 1 CAR (Basel III)29


17.0%


14.6%**




* Figures per IAS39
**1H 2017 figures are given based on previous regulation in accordance with Basel II/III guidelines
 
 
 
Ratio definitions
1. Underlying return on average total equity (ROE) equals underlying net income attributable to owners divided by the monthly average of total shareholders' equity attributable to the PLC's equity holders for the same period adjusted for the respective one-off items; Annualised where applicable.
2. Return on average total equity (ROE) equals net income attributable to owners divided by the monthly average of total shareholders' equity attributable to the PLC's equity holders for the same period; Annualised where applicable.
3. Underlying return on average total assets (ROA) equals underlying net income of the period divided by monthly average total assets for the same period; Annualised where applicable.
4. Return on average total assets (ROA) equals net income of the period divided by monthly average total assets for the same period; Annualised where applicable.
5. Pre-Provision Return on average total equity (ROE) equals net income attributable to owners excluding all provision charges divided by monthly average of total shareholders 'equity attributable to the PLC's equity holders for the same period.
6. Cost to income ratio equals total operating expenses for the period divided by the total revenue for the same period. (Revenue represents the sum of net interest income, net fee and commission income and other non-interest income).
7. Cost of risk equals provision for loan impairment divided by monthly average gross loans and advances to customers; Annualised where applicable.
8. Net interest margin (NIM) is net interest income divided by monthly average interest-earning assets; Annualised where applicable. Interest-earning assets include investment securities excluding corporate shares, net investment in finance lease, net loans, and amounts due from credit institutions. The latter excludes all items from cash and cash equivalents, excludes EUR mandatory reserves with the NBG that currently have negative interest, and includes other earning items from due from banks.
9. Risk Adjusted Net interest margin is NIM minus cost of risk without one -offs and currency effect.
10. Loan yields equal interest income on loans and advances to customers divided by monthly average gross loans and advances to customers. Annualised where applicable.
11. Risk Adjusted Loan yield is loan yield minus cost of risk without one-offs and currency effect.
12. Deposit rates equal interest expense on customer accounts divided by monthly average total customer deposits; Annualised where applicable.
13. Yields on interest earning assets equal total interest income divided by monthly average interest earning assets; Annualised where applicable.
14. Cost of funding equals total interest expense divided by monthly average interest bearing liabilities; Annualised where applicable.
15. Spread equals difference between yields on interest earning assets (including but not limited to yields on loans, securities and due from banks) and cost of funding (including but not limited to cost of deposits, cost on borrowings and due to banks).
16. PAR 90 to gross loans ratio equals loans for which principal or interest repayment is overdue for more than 90 days divided by the gross loan portfolio for the same period.
17. NPLs to gross loans equals loans with 90 days past due on principal or interest payments, and loans with well-defined weakness, regardless of the existence of any past-due amount or of the number of days past due divided by the gross loan portfolio for the same period.
18. NPLs coverage ratio equals total loan loss provision calculated per IFRS 9 divided by the NPL loans.
19. NPLs coverage with collateral ratio equals loan loss provision calculated per IFRS 9 plus total collateral amount of NPL loans (excluding third party guarantees) discounted at 30-50% depending on segment type divided by the NPL loans.
20. Provision level to gross loans equals loan loss provision divided by the gross loan portfolio for the same period.
21. Related party loans to total loans equals related party loans divided by the gross loan portfolio.
22. Top 10 borrowers to total portfolio equals total loan amount of top 10 borrowers divided by the gross loan portfolio.
23. Top 20 borrowers to total portfolio equals total loan amount of top 20 borrowers divided by the gross loan portfolio.
24. Net loans to deposits plus IFI funding ratio equals net loans divided by total deposits plus borrowings received from international financial institutions.
25. Net stable funding ratio equals available amount of stable funding divided by required amount of stable funding as defined in Basel III.
26. Liquidity coverage ratio equals high-quality liquid assets divided by total net cash outflow amount as defined by NBG.
27. Leverage equals total assets to total equity.
28. Regulatory tier 1 CAR equals tier I capital divided by total risk weighted assets, both calculated in accordance with the pillar 1 requirements of NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.
29. Regulatory total CAR equals total capital divided by total risk weighted assets, both calculated in accordance with the pillar 1 requirements of NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.
 
 
 
 
 
Exchange Rates
To calculate the QoQ growth of the Balance Sheet items without the currency exchange rate effect, we used the USD/GEL exchange rate of 2.4144 as of 31 March 2018. For the calculations of the YoY growth without the currency exchange rate effect, we used the USD/GEL exchange rate of 2.4072 as of 30 June 2017. As of 30 June 2018 the USD/GEL exchange rate equalled 2.4516. For P&L items growth calculations without currency effect, we used the average USD/GEL exchange rate for the following periods: 2Q 2018 of 2.4460, 1Q 2018 of 2.4854, 2Q 2017 of 2.4187.
 
 
Additional Disclosures
Subsidiaries of TBC Bank Group PLC[11]  
 




 


Ownership / voting

% as of 30 June 2018


Country


Year of incorporation


Industry


Total Assets 

(after elimination)


 




Subsidiary


Amount
GEL'000


% in TBC Group


 




JSC TBC Bank


99.9%


Georgia


1992


Banking


13,235,143


97.44%




    United Financial Corporation JSC


98.7%


Georgia


1997


Card processing


8,474


0.06%




    TBC Capital LLC


100.0%


Georgia


1999


Brokerage


8,535


0.06%




    TBC Leasing JSC


99.6%


Georgia


2003


Leasing


220,180


1.62%




    TBC Kredit LLC


75.0%


Azerbaijan


1999


Non-banking credit institution


31,670


0.23%




    Banking System Service Company LLC


100.0%


Georgia


2009


Information services


593


0.00%




    TBC Pay LLC


100.0%


Georgia


2009


Processing


33,617


0.25%




    Index LLC


100.0%


Georgia


2011


Real estate management


292


0.00%




    Real Estate Management Fund JSC


100.0%


Georgia


2010


Real estate management


21


0.00%




    TBC Invest LLC


100.0%


Israel


2011


PR and marketing


313


0.00%




JSC TBC Insurance


100.0%


Georgia


2014


Insurance


42,473


0.31%


 




 


 


 


 


 


 


 




 
1) Earnings per Share




In GEL


30-Jun-2018


30-Jun-2017




Earnings per share for profit attributable to the owners of the Group:


 


 




- Basic earnings per share


3.70


3.31




- Diluted earnings per share


3.67


3.26




Source: IFRS Consolidated
 




In GEL


2Q 2018


2Q 2017




Earnings per share for profit attributable to the owners of the Group:


 


 




- Basic earnings per share


1.90


1.49




- Diluted earnings per share


1.88


1.47




Source: IFRS Consolidated
 
2) Sensitivity Scenario




Sensitivity Scenario


30-Jun-18


10% Currency Devaluation Effect




NIM*


 


-0.1%




Technical Cost of Risk


 


+0.2%




Regulatory Total Capital per new NBG regulation


1,908


1,929




Regulatory Capital adequacy ratios tier 1 and total capital per new NBG regulation decrease by


 


0.50% - 0.79%




 
(*) Linear depreciation is assumed for NIM sensitivity analysis
Source: IFRS statements and Management Figures
 
 
3) FC Details for Selected P/L Items




Selected P&L Items 2Q 2018


FC % of Respective Totals




Interest Income


38%




Interest Expense


49%




Fee and Commission Income


31%




Fee and Commission Expense


64%




Administrative Expenses


15%




 
Source: IFRS statements and Management figures
 
 
4) Open Interest Rate Position as of 30 June 2018
 




Open interest rate  position in GEL


GEL     -121 m


 


Open interest rate position in FC


GEL 1,314 m




 


GEL m


% share in totals


 


 


GEL m


% share in totals




Assets


2,017


15%


 


Assets


2,928


22%




Securities with fixed yield(≤1y)*


355


27%


 


Nostro**


178


22%




Securities with floating yield


49


4%


 


NBG Reserves**


1,034


73%




Loans with Floating yield


1,495


17%


 


NBG Deposits


171


12%




Reserves in NBG


114


8%


 


Libor Loans


1,534


17%




Interbank loans& Deposits & Repo


4


1%


 


Interest Rate Swap


11


 




Liabilities


2,138


18%


 


 


 


 




Current accounts***


461


6%


 


Liabilities


1,614


14%




Saving accounts***


463


6%


 


 Senior Loans


1,317


45%




Refinancing Loan of NBG


679


23%


 


 Subordinated Loans


297


75%




Interbank Loans &Deposits & Repo


87


42%


 


 


 


 




IFI Borrowings


448


15%


 


 


 


 




 


 


 


 


 


 


 




(*) 44% of the less than 1-year securities are maturing in 6 months.
(**) Income on NBG reserves and Nostros are calculated as benchmark minus margin whereby benchmarks are correlated with Libor. From March, 2016  according to NBG regulation is it possible  to apply negative interest rates on NBG reserves and correspondent accounts, therefore these two items close the gap in case of both upward and downward movement of Libor rate.
(***) The Bank considers that current and saving deposits promptly react to interest rate changes on the market (within 1 month prior notification).
Source: IFRS Group Data
 




5) Yields and Rates


 


 


 


 




 


 


 


 


 


 




Yields and Rates


2Q'18


1Q'18


4Q'17


3Q'17


2Q'17




Loan yields


12.5%


12.3%


12.3%


11.9%


12.4%




Retail loan yields  GEL


21.3%


20.5%


19.7%


19.2%


19.7%




Retail loan yields FX


8.0%


8.4%


8.8%


8.5%


9.0%




Retail Loan Yields


14.7%


14.6%


14.2%


13.8%


14.2%




Corporate loan yields  GEL


11.4%


11.2%


12.2%


11.0%


10.6%




Corporate loan yields FX


8.7%


8.6%


9.2%


8.6%


9.5%




Corporate Loan Yields


9.4%


9.2%


10.0%


9.2%


9.8%




MSME loan yields  GEL


15.9%


15.0%


13.6%


13.1%


13.4%




MSME loan yields FX


8.5%


8.9%


9.4%


9.4%


10.4%




MSME Loan Yields


12.0%


11.3%


10.9%


10.7%


11.4%




Deposit rates


3.3%


3.3%


3.5%


3.4%


3.5%




Retail deposit rates GEL


4.3%


4.4%


4.4%


4.0%


3.9%




Retail deposit rates FX


2.4%


2.5%


2.7%


2.8%


3.0%




Retail Deposit Yields


2.7%


2.8%


2.9%


3.0%


3.1%




Corporate deposit rates GEL


7.9%


8.0%


8.5%


8.3%


8.5%




Corporate deposit rates FX


1.9%


2.0%


2.1%


2.2%


2.1%




Corporate Deposit Yields


5.2%


5.2%


5.3%


5.2%


5.2%




MSME deposit rates GEL


1.7%


1.8%


2.1%


2.2%


2.2%




MSME deposit rates FX


0.4%


0.5%


0.8%


0.7%


0.6%




MSME Deposit Yields


1.0%


1.1%


1.4%


1.4%


1.3%




Yields on Securities


7.7%


8.1%


6.9%


8.4%


7.8%




Source: IFRS Consolidated
 
 
 




6) Risk Adjusted Yields & Cost of Risk 


 


 




Risk-adjusted Yields


2Q'18


 


1Q'18


4Q'17


3Q'17


2Q'17


 




Loan yields


10.8%


 


10.6%


11.1%


10.7%


10.9%


 




Retail Loan Yields


12.1%


 


11.6%


12.2%


10.8%


10.9%


 




Corporate Loan Yields


8.5%


 


9.3%


9.6%


11.1%


11.3%


 




MSME Loan Yields


11.1%


 


9.8%


10.4%


9.9%


10.5%


 




 


 


 


 


 


 


 


 


 


 


 


 




Cost of Risk


2Q'18


 


1Q'18


 


4Q'17


3Q'17


 


2Q'17


 




Retail


2.6%


 


2.7%


 


2.0%


3.2%


 


3.1%


 




Corporate


0.9%


 


-0.8%


 


0.7%


-1.7%


 


-1.6%


 




MSME


1.0%


 


1.0%


 


0.7%


0.9%


 


0.7%


 




Total


1.8%


 


1.3%


 


1.4%


1.3%


 


1.3%


 



 
 
 
 
 
 
 
 
 
 
 
 



Source: IFRS Consolidated
 
 
7) Loan Quality per NBG
 
Sub-Standard, Doubtful and Loss (SDL) Loans Ratio per NBG




 


Jun-18


Mar-18


Dec-17


Sep-17


Jun-17




SDL Loans as % of Gross Loans


3.3%


3.1%


3.2%


3.4%


3.3%




  Source: NBG
 
8) Cross Sell Ratio[12] and Number Active Products




 


Jun-18


Mar-17


Dec-17


Sep-17


Jun-17




Cross Sell Ratio


3.89


3.88


3.94


3.79


3.67




Number of Active Products (in millions)


4.64


4.58


4.50


4.06


3.78




Source: Management figures
 
 
9) Diversified Deposit Base
 
Status: monthly income >=GEL 3,000 or loans/deposits >=GEL 30,000
VIP: deposit >=USD 100,000 as well as on discretionary basis; WM: >=USD 100,000 as well as on discretionary basis
Wealth Management includes UHNW and HNW non-resident clients
 
 




30 June 2018


Volume of Deposits


Number of Deposits




MASS


38%


92.7%




STATUS


30%


6.8%




VIP


24%


0.4%




Wealth Management for non-resident clients


8%


0.1%




 Source: Management figures
 
10) Loan Concentration




 


Jun-18


Mar-18


Dec-17


Sep-17


Jun-17




Top 20 Borrowers as % of total portfolio


13.2%


13.4%


12.4%


12.5%


13.0%




Top 10 Borrowers as % of total portfolio


9.2%


9.4%


8.2%


8.3%


9.1%




Related Party Loans as % of total portfolio


0.1%


0.1%


0.1%


0.1%


0.1%




 Source: IFRS consolidated
 
11) Number of Active Clients (in thousands)




 


Jun-18


Mar-18


Dec-17


Sep-17


Jun-17




Internet or Mobile Banking


479


447


461


375


340




Mobile Banking


391


365


359


289


254




Source: Management figures
 
 
12) Number of Transactions in Digital Channels




 


2Q 18


1Q 18


4Q 17


3Q 17


2Q 17




Internet banking number of transactions (in thousands)


2,583


2,449


2,743


2,175


2,166




Mobile banking number of transactions (in thousands)


6,266


5,315


5,207


3,953


3,163




POS number of transactions (in thousands)


22,290


17,887


16,416


13,326


11,328




POS volume of transactions (in mln GEL)


850


661


631


543


447




* Data includes e-commerce and excludes transactions at POS terminals in TBC Bank's branches
Source: Management figures
 
 
13) Penetration Ratios of Digital Channels
 




 


Jun-18


Mar-18


Dec-17


Sep-17


Jun-17




IB&MB Penetration Ratio


40%


38%


40%


35%


33%




Mobile Banking Penetration Ratio


33%


31%


31%


27%


25%




Source: Management figures
 
 
14) Net outflow of borrowed funds
Subordinated and Senior Loans' Principal Amount Outflow by Year (GEL million)
 




2018


2019


2020


2021


2022


2023


2024


2025


2026


2027




216


329


490


532


289


232


98


113


159


11




 
Source: Management figures, revolving non IFI loans from NBG are excluded
 
15) NPL Build Up (in GEL millions)




 


 


 


 


 


 


 


 




NPLs


 


NPLs as of Mar-17


Real Growth


FX Effect


Write-Offs


Repossessed


NPLs as of Jun-18




Retail


 


107


32


1


-19


-1


120




Corporate


 


62


9


1


0


0


72




MSME


 


89


1


1


-5


-1


85




Total


 


258


42


3


-24


-2


277




 








 
16) Net Write-Offs, 2Q 2018




 


 


 


 


 




 In GEL millions


 


Write-Offs


Recoveries


Net Write-Offs




Retail


 


-19


7


-12




Corporate


 


0


1


1




MSME


 


-5


3


-2




Total


 


-24


11


-13




Source: IFRS Consolidated


 



 
 
 
 
 
 



 
 
17) Portfolio Breakdown by Collateral Types as of 30-Jun-18








 


 




Cash Cover


2%


 




Gold


3%


 




Inventory


9%


 




Real Estate


63%


 




Third Party Guarantees


6%


 




Other


2%


 




Unsecured


15%


 



 
 
 
 





Source: IFRS Consolidated
 
 
 
 




 
18) Loan to Value by Segments as of 30-Jun-18




 


 


 


 




Retail


Corporate


MSME


Total




47%


45%


45%


45%




Mortgage loan's LTV stood at 47%


 


 




 
19) TBC Insurance
TBC Insurance is a wholly owned subsidiary of the Company and the Bank's main bank assurance partner. It was acquired by the Group in October 2016 and has been growing rapidly since then. TBC Insurance's product offering comprises motor, travel, personal accident, credit life and property, business property, liability, and cargo insurance products. The company uses a broad range of channels to sell its products, including insurance agents, auto dealerships, web platforms, as well as TBC Bank's market-leading multichannel network.
In line with the Group's digitalisation strategy, TBC Insurance actively uses digital channels to market and sell its products. In 2017, TBC Insurance launched on the local market the first insurance chat bot, B Bot, which sells different types of insurance products. B Bot is fun to use and is quickly gaining popularity among our clients, especially the younger generation. Another popular sales channel is the wide network of TBC Bank's self-service terminals, where customers can buy travel, casualty and collision (CASCO), and motor third-party liability (MTPL) insurance in a very short time. In addition, travel insurance can be purchased through TBC Bank's internet and mobile banking services; more products are planned to be added to this channel in 2018, including payment protection insurance (PPI), CASCO and MTPL.
The insurance business delivered outstanding financial results in a short period of time. In 2Q 2018, its P&C market share grew to 17.9%[13] YoY from 9.0%. Over the same period, the number of clients increased 1.7 times to around 300,000. In line with the significant growth of customers, TBC insurance posted GEL 14,677 thousand in gross written premium, up by 134% YoY and net earned premium reached GEL 7,517 thousand, up by 94% in respective period.  In addition, net combined ratio decreased to 81% in 2Q 2018 from 107% a year ago. As a result, net profit amounted to GEL 1,497 thousand in 2Q 2018 compared to loss of GEL 94 million in 2Q 2017.
 




In thousands of GEL


2Q'18


1Q'18


4Q'17


3Q'17


2Q'17




Gross written premium


14,677


12,494


12,153


8,584


6,275




Net earned premium[14]


7,517


6,458


5,881


4,622


3,873




Net profit


1,497


1,260


601


885


(94)




 


1Q'18


1Q'18


4Q'17


3Q'17


2Q'17




Net combined ratio


81%


76%


93%


92%


107%




 


 


 


 


 


 




 


Jun-2018


       Mar-2018


Dec-2017


Sep-2017


Jun-2017




Market share11


17.9%


19.0%


13.3%


10.9%


9.0%




Number of clients


296,341


295,607


276,848


239,472


174,385


 



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
 
 
 
 
20) Reconciliation of reported IFRS consolidated figures with underlying numbers




 


Q2 2017


HY 2017




Reported Net interest income


   149,741


     292,074




 


 


 




Reported Net fee and commission income


     28,741


       55,217




Reported Gross Insurance Profit


       1,856


         3,081




 


 


 




Reported Other operating income


     26,754


       60,202




 


 


 




Reported operating income


   207,092


     410,574




 


 


 




Reported total provision expenses


   (25,715)


     (43,374)




 


 


 




Reported operating income after provisions


   181,377


     367,200




 


 


 




Reported Staff Cost


  (54,838)


  (102,376)




Reported Other Administrative Expenses


  (38,092)


    (73,474)




Total Reported Operating expenses


   (92,930)


   (175,850)




One-off related to BR integration - staff cost


    (3,073)


      (3,073)




One-off related to BR integration - other admin expenses


    (4,565)


      (6,417)




Underlying staff cost


  (51,765)


    (99,303)




Underlying other admin expenses


  (33,527)


    (67,057)




Total Underlying operating expenses


   (85,292)


   (166,360)




 


 


 




Reported profit before tax


     88,447


     191,350




Underlying profit before tax


     96,085


     200,840




 


 


 




Reported income tax


     (8,590)


     (14,935)




Effect on tax of one-off items


      1,146


        1,424




Underlying income tax


     (9,736)


     (16,359)




 


 


 




Reported net profit


     79,857


     176,415




Underlying net profit


     86,349


     184,481




 


 


 




Non controlling interest (NCI)


       1,313


         2,896




Reported net profit less NCI


     78,544


     173,519




Underlying net profit less NCI


     85,036


     181,585




 


 


 




Underlying ROE


20.4%


22.5%




Underlying ROA


3.2%


3.5%




Underlying cost to income


41.2%


40.5%




 




 



 

Q2 2018


HY 2018




Reported Net interest income


   188,204


     363,607




Reported Net fee and commission income


     40,178


       75,098




Reported Gross Insurance Profit


       2,237


         4,283




Reported Other operating income


     27,799


       54,129




Reported operating income


   258,418


     497,117




Reported total provision expenses


   (35,091)


     (74,554)




Reported operating income after provisions


   223,327


     422,563




Staff Cost


   (50,732)


   (102,847)




Other Administrative Expenses


   (41,358)


     (80,175)




Reported Operating expenses


   (92,090)


   (183,022)



 
 
 



Reported profit before tax


   131,237


     239,541




Reported income tax


   (28,799)


     (39,578)




Effect on tax of one-off items


  (17,426)


    (17,426)




Underlying income tax


   (11,373)


     (22,152)



 
 
 



Reported net profit


   102,438


     199,963




Underlying net profit


   119,864


     217,389



 
 
 



Reported non-cozntrolling interest (NCI)


        (151)


         1,616




Reported net profit less NCI


   102,589


     198,347




Underlying net profit less NCI


   120,015


     215,773



 
 
 


 

Q2 2018


HY 2018




Underlying ROE


24.9%


23.0%




Underlying ROA


3.7%


3.4%




 
 
21) Regulatory Capital
Total Capital and Tier 1 Capital Limits




 


2017 Actual


2018  F


2019 F


2020 F


2021 F




 


Tier 1


Total


Tier 1


Total


Tier 1


Total


Tier 1


Total


Tier 1


Total




Minimum Requirement


6.0%


8.0%


6.0%


8.0%


6.0%


8.0%


6.0%


8.0%


6.0%


8.0%




Conservation Buffer


2.5%


2.5%


2.5%


2.5%


2.5%


2.5%


2.5%


2.5%


2.5%


2.5%




Counter-Cyclical Buffer


0.0%


0.0%


0.0%


0.0%


0.0%


0.0%


0.0%


0.0%


0.0%


0.0%




Systemic Buffer


0.0%


0.0%


1.0%


1.0%


1.5%


1.5%


2.0%


2.0%


2.5%


2.5%




Pillar 1 buffers


8.5%


10.5%


9.5%


11.5%


10.0%


12.0%


10.5%


12.5%


11.0%


13.0%




In addition, the pillar 2 buffers in tier 1 will be in the range of 1.5%-2.5% in 2018 and gradually increase to the range of 2.5%-4.0% by 2021. The pillar 2 buffers in total capital will be in the range of 3.0%-5.0% from 2018 to 2021
 
 








22) Space- full scale digital bank




Date


# of app. Downloads




10-May-2018


185




20-May-2018


55,408




30-May-2018


69,510




10-Jun-2018


83,597




20-Jun-2018


90,475




30-Jun-2018


99,646




10-Jul-2018


108,270




20-Jul-2018


121,919




30-Jul-2018


128,205




 
As of 30 July 2018, Space has attracted around 55,000 customers.
 
 
 
Principal Risks and Uncertainties
 
Risk management is a critical pillar of the Group's strategy. To perform it effectively, it is essential to identify emerging risks and uncertainties. The principal risks that could adversely impact on the Group's performance, financial condition and prospects are presented below. Performance may be affected by additional risks and uncertainties other than those listed below and some as-yet-unknown risks that emerge in the future.
 
1. Principal risk
The Group faces currency-induced credit risk due to the high share of loans denominated in foreign currencies in the Group's portfolio.
 
The potential for further GEL depreciation is one of the most significant risks that could negatively impact on portfolio quality due to the large presence of foreign currencies on the Group's balance sheet. Unhedged borrowers could suffer from increased debt burden when their liabilities denominated in foreign currencies are amplified.
 
Risk description
A significant share of the Group's loans (and a large share of the total banking sector loans in Georgia) is denominated in currencies other than the GEL, particularly the USD. As of 30 June 2018, the National Bank of Georgia reported that 54.8% of total banking sector loans were denominated in foreign currencies. As of the same date, 58.5% of the Group's total gross loans and advances to customers (before provision for loan impairment) were denominated in foreign currencies.
The income of many customers is directly linked to USD via remittances, or exports in case of business borrowers. Nevertheless, customers may not be protected against significant fluctuations in the GEL's exchange rate against the currency of the loan.
 
Exchange rate of GEL against major currencies remained broadly stable during H1 2018. As of the end of June, 2018 USD/GEL exchange rate of GEL depreciated by 1.8% YoY, while EUR/GEL exchange rate depreciated by 4.0% YoY. Real effective exchange rate gained 0.3% YoY in the same period.
 
The National Bank of Georgia operates effectively under its inflation-targeting framework. However, the GEL remains in free float and is exposed to many internal and external factors that in some circumstances could result in devaluation against the USD.
 
Risk mitigation
Specific attention is paid to currency-induced credit risk due to the high share of loans denominated in foreign currencies in the portfolio. The vulnerability to exchange rate depreciation is monitored on a frequent basis to be able to promptly implement an action plan, when and as needed. The ability to withstand certain exchange rate depreciation is incorporated into the credit underwriting standards, which also include applying significant currency devaluation buffers for uncharged borrowers. In addition, the Group holds significant capital against currency-induced credit risk. Given the experience and knowledge built throughout the recent currency volatility, the Group is in a good position to promptly mitigate emerging exchange rate depreciation risks.
 
In 2017, the government enacted a law aimed at reducing the economy's dependence on foreign currency by requiring loans for amounts of less than GEL 100,000 to be disbursed in local currency.
This and other initiatives have helped to reduce the share of loans denominated in foreign currencies in TBC Bank's retail portfolio.
 
2. Principal risk
The Group's performance may be compromised by adverse developments in the economic environment.
A slowdown of economic growth in Georgia would have an adverse impact on the repayment capacity of the borrowers, restraining their future investment and expansion plans. These occurrences would be reflected in the Group's portfolio quality and profitability and would also impede the portfolio growth rates. Negative macroeconomic developments could compromise the Group's performance through various parameters, such as rising unemployment rates, increasing retail sector default rates, falling property values, worsening loan collateralization, or falling debt service capabilities of companies suffering from decreasing sales.
 
Potential political and economic instability in the neighbouring and main trading partner countries could negatively impact the economic outlook of Georgia through a worsening current account (eg. decreased exports, tourism inflows, remittances and foreign direct investments).
 
 
 
 
Risk description
As the Group operates primarily in, and sources nearly all its revenue from Georgia, its business, financial condition and operating results are, and will continue to be, highly dependent on the general economic conditions in the country.
During 2011-17, the Georgian economy recorded average real GDP growth of 4.6% per annum. Economic growth continued to improve, with real GDP growth amounting to 5.7% YoY in H1 2018, compared to 5.0% growth in 2017 and 2.8% in 2016. The improvement was driven by supportive external demand as well as the recovery of domestic investment and consumption demand.
 
Georgia's economy is open, liberal, well diversified and reasonably reformed. While it has shown resilience during international or regional crises, it is still exposed to many internal and external developments. These could result in lower growth or, in some severe circumstances, a contraction of the economy.
 
Risk mitigation
To decrease its vulnerability to economic cycles and adverse developments, the Group identifies and limits its exposure to cyclical industries within its risk appetite framework.
 
The Group has in place a macroeconomic monitoring process that relies on close, recurrent observations of the economic developments in Georgia, as well as its neighbouring countries, to identify early warning signals indicating imminent economic risks. This system allows the Group to promptly assess significant economic and political occurrences and analyse their implications for the loan portfolio. The identified implications are duly translated into specific action plans with regards to reviewing the underwriting standards, risk appetite metrics or limits, including the limits for each of the most vulnerable industries.
 
Additionally, the stress-testing and scenario analysis applied during the credit review and portfolio monitoring processes enable the Group to have an advance evaluation of the impact of macroeconomic shocks on the business and the portfolio.
Resilience towards a changing macroeconomic environment is incorporated into the Group's credit underwriting standards. As such, borrowers are expected to withstand certain adverse economic developments through prudent financials, debt-servicing capabilities and conservative collateral coverage.
 
3. Principal risk
The Group encounters the capital risk of not meeting the minimum regulatory requirements, which may compromise growth and strategic targets.
 
The Bank is regulated by the National Bank of Georgia. The regulations and various terms of its funding and other arrangements require compliance with certain capital adequacy and other ratios. Local regulatory requirements are more conservative than the current Basel standards. At the same time, the local regulator has the right to impose additional regulations on a bank if it perceives excessive risks and uncertainties in that lender or in the market.
 
Risk description
The National Bank of Georgia has introduced a new capital adequacy framework that came into force in December 2017. The updated regulation divides the current capital requirement across Pillar 1 and Pillar 2 buffers that are introduced gradually over a four-year period. The Bank's capitalisation as of 30 June 2018 stood at 13.4% and 17.0% against the regulatory minimum requirement of 10.2% and 15.6% for Tier 1 and Total capital, respectively. The ratios are well above the respective regulatory minimums. The Bank will stay well capitalized throughout transition period (2018-2021) via generated Tier 1 capital through retained earnings.
 
From January 2018, the National Bank of Georgia has fully phased out the Basel I and Basel II/III capital adequacy standards and replaced them with the updated capital framework, which is more compliant with the Basel III guidelines.
 
Risk mitigation
The Group undertakes stress-testing and sensitivity analysis to quantify extra capital consumption under different scenarios. Such analyses indicate that the Group holds sufficient capital to steadily meet the minimum regulatory requirements.
 
Capital forecasts, as well as the results of the stress-testing and what-if scenarios, are actively monitored with the involvement of the Bank's Management Board and Risk Committee to ensure prudent management and timely actions when needed. In addition, under the new capital adequacy framework, the Pillar 2 minimum capital requirements can be reduced by the amount equal to the additional capital needed, as a result of the increased risk-weighted assets due to the technical effect of GEL devaluation.
 
4. Principal risk
The Group is exposed to regulatory risk.
The Group's activities are highly regulated and thus face regulatory risk. The local regulator, the National Bank of Georgia, can increase the prudential requirements across the whole sector as well as for specific institutions within it. Therefore, the Group's profitability and performance may be compromised by an increased regulatory burden, including higher capital requirements.
 
Risk description
The Bank is regulated by the National Bank of Georgia. In addition to mandatory capital adequacy ratios, the regulator sets lending limits and other economic ratios, including, inter alia, lending, liquidity and investment ratios.
 
In May 2018, NBG implemented interim regulation on responsible lending standards. The regulation introduces new requirements for individual borrower income verification.  Banks will be limited on loan portfolios with no income verification at 25% and 15% of the regulatory capital for unsecured and collateralized loans, respectively. Collateralized loans include only loans secured by real estate, and do not include loans which was disbursed for purchase of residential real estate.
 
Under the Georgian banking regulations, the Bank is required, among other things, to comply with minimum reserve requirements and mandatory financial ratios and regularly file periodic reports. The Bank is also regulated by respective tax code or other relevant laws in Georgia.
 
Following the Company's listing on the London Stock Exchange's premium segment, the Group became subject to increased regulations from the UK Financial Conduct Authority.
 
In addition to its banking operations, the Group also offers other regulated financial services products, including leasing, insurance and brokerage services.
 
The Group's current operations in Azerbaijan (through TBC Kredit) are required to comply with the local regulations. Due to expected merger with Nikoil Bank, the Bank's footprint in Azerbaijan increases leading to increased local regulatory oversight and compliance requirements. 
 
The Group's operations remain in full compliance with all relevant legislation and regulations.
 
The Group is also subject to financial covenants in its debt agreements.
 
 Risk mitigation
The Group has established systems and processes to ensure full regulatory compliance.
 
The dedicated compliance department reports directly to the Chief Executive Officer and bears the primary responsibility for regulatory compliance. However, compliance is embedded in all levels of the Bank's operations.
 
The Group's RECC is responsible for regulatory compliance at the Board level.
 
In terms of banking regulations and Georgia's taxation system, the Group is closely engaged with the regulator to ensure that new procedures and requirements are discussed in detail before their implementation.
 
Although decisions made by regulators are beyond the Group's control, significant regulatory changes are usually preceded by a consultation period that allows all lenders to provide feedback and adjust their business practice.
 
Together with the new regulation on responsible lending, the government is introducing initiatives to ensure continuous broad access to financing. These include simplification of the tax code to incentivize income registration rate.  Moreover, we are in dialogue with the regulator to determine appropriate income verification techniques including analytical approaches. Regulator is consulting with the banking sector as it prepares the full version of responsible lending regulation to be introduced in 2019.
 
5. Principal risk
The Group is exposed to concentration risk.
Banks operating in developing markets are typically exposed to both single-name and sector concentration risks.
The Group has large individual exposures to single-name borrowers whose potential default would entail increased credit losses and high impairment charges.
 
The Group's portfolio is well diversified across sectors, resulting in only a moderate vulnerability to sector concentration risks. However, should exposure to common risk drivers increase, the risks are expected to amplify correspondingly.
 
 
 
 
Risk description
The Group's loan portfolio is diversified, with maximum exposure to a single industry (ie energy and utility) standing at 7.3%. Considering the macroeconomic outlook, this figure is reasonable and demonstrates adequate credit portfolio diversification.
 
The exposure to the 20 largest borrowers stands at 13.2%, which is in line with the Bank's target of alleviating concentration risk.
 
Risk mitigation
The Group constantly checks the concentrations of its exposure to single counterparties, as well as sectors and common risk drivers, and introduces limits for risk mitigation.
 
As part of its risk appetite framework, the Group limits both single-name and sector concentrations. Any considerable change in the economic or political environment, in Georgia or neighbouring countries, will trigger the Group's review of the risk appetite criteria to mitigate emerging risk concentrations. Stringent monitoring tools are in place to ensure compliance with the established limits. In addition, the Bank has dedicated restructuring teams to manage weakened borrowers. When it is deemed necessary, clients are transferred to such teams for more efficient handling and, ultimately, to limit resulting credit risk losses.
 
The National Bank of Georgia's new capital framework introduced a concentration buffer under Pillar 2 that helps to ensure that the Group remains adequately capitalized to mitigate concentration risks.
 
6. Principal risk
Liquidity risk is inherent in the Group's operations.
 
While the Board believes that the Group currently has sufficient financial resources available to meet its obligations as they fall due, liquidity risk is inherent in banking operations and can be heightened by numerous factors. These include an overreliance on, or an inability to access, a particular source of funding, as well as changes in credit ratings or market-wide phenomena, such as the global financial crisis that commenced in 2007.
 
Access to credit for companies in emerging markets is significantly influenced by the level of investor confidence and, as such, any factors affecting investor confidence (eg. a downgrade in credit ratings, central bank or state interventions, or debt restructurings in a relevant industry) could influence the price or availability of funding for companies operating in any of these markets.
 
Risk description
the Group stayed in compliance with the risk appetite limits, as well as the minimum liquidity requirements set by the National Bank of Georgia, which introduced a liquidity coverage ratio in 2017. This is in addition to the Basel III guidelines, under which a conservative approach was applied to the weighting of mandatory reserves and to the deposit withdrawal rates, depending on the concentration of client groups. From 2019 NBG plans to introduce new liquidity requirement for commercial banks - Basel Net Stable Funding Ratio for long term liquidity Risk Management purposes.
 
As of 30 June 2018, the net loan to deposits plus international financial institution funding ratio stood at 89.5%, the liquidity coverage ratio at 119.2%, and the net stable funding ratio at 127.8%. All are comfortably above the National Bank of Georgia's minimum requirements or guidance for such ratios.
 
Risk mitigation
To mitigate this risk, the Group holds a solid liquidity position and performs an outflow scenario analysis for both normal and stress circumstances to make sure that it has adequate liquid assets and cash inflows. The Group maintains a diversified funding structure to manage respective liquidity risk. The Board believes there is adequate liquidity to withstand significant withdrawals of customer deposits, but the unexpected and rapid withdrawal of a substantial amount of deposits could have a material adverse impact on the Group's business, financial condition, results of operations and/or prospects. As part of its liquidity risk management framework, the Group has a liquidity contingency plan in place outlining the risk indicators for different stress scenarios and respective action plans.
 
7. Principal risk
Any decline in the Group's net interest income or net interest margin could lead to a reduction in profitability.
 
Net interest income accounts for the majority of the Group's total income. Consequently, fluctuations in its NIM affect the results of operations. High competition on the local banking sector could drive interest rates down, compromising the Group's profitability. In addition, regulatory changes might effect on NIM.  At the same time, the cost of funding is largely exogenous to the Group and is derived based on both the national and international markets.
 
Risk description
The majority of the Group's total income derives from net interest income. Consequently, the Group's results of operations are affected by fluctuations in its NIM.
 
In Q2 2018, the NIM increased by 0.3 pp YoY to 7.1%, which the Bank had expected and included in the forecast that provides the basis for the Group's guidance.
 
Finally, the Group limits its direct exposure to the LIBOR and local refinancing rates or, where this is not feasible, prices them appropriately between assets and liabilities. As of 30 June 2018, GEL 2,928 million in assets (22%) and GEL 1,614 million in liabilities (14%) were floating, related to the LIBOR/FED/ECB (deposit facility) rates. During the same period, GEL 2,017 million of assets (15%) and GEL 2,138 million of liabilities (18%) were floating, related to the National Bank of Georgia's refinancing rate.
 
Risk mitigation
The high current margin levels, increase in fee and commission income and continuous cost optimization efforts represent a safeguard against margin declines, posing profitability concerns for the Group.
 
The Group has also launched an enhancement program for margin management, including an adequate pricing framework and profitability analysis, to assist in decision making. In cases where loans are extended on fixed rather than floating terms, the interest rate risk is adequately translated into price premiums, safeguarding against changes in the interest rates.
 
The Group expects margins to be stabilized in the medium term. The Group expects that the decreasing margins will be compensated in practice by increased fee and commission income and decreased unit cost spent per transaction.
 
8. Principal risk
The threat posed by cyber-attacks has increased in recent years and continues to grow.
 
The risk of potential cyber-attacks, which have become more sophisticated, may lead to significant security breaches. Such risks change rapidly and require continued focus and investment.
 
Risk description
No major cyber-attack attempts have targeted Georgian commercial banks in recent years. Nonetheless, the Group's rising dependency on IT systems increases its exposure to potential cyber-attacks.
 
Risk mitigation
The Group actively monitors, detects and prevents risks arising from cyber-attacks. Staff monitor the developments on both local and international markets to increase awareness of emerging forms of cyber-attacks. Intrusion prevention and Distributed Denial of Service (DDoS) protection systems are in place to protect the Group from external cyber-threats. Security incident and event monitoring systems, in conjunction with respective processes and procedures, are in place to handle cyber-incidents effectively.
 
Processes are continuously updated and enhanced to respond to new potential threats. A data recovery policy is in place to ensure business continuity in case of serious cyber-attacks.
 
9. Principal risk
External and internal fraud risks are part of the operational risk inherent in the Group's business. Considering the increased complexity and diversification of operations together with the digitalization of the baking sector, fraud risks are evolving. Unless proactively managed, fraud events may materially impact the Group's profitability and reputation.
 
Risk description
External fraud events may arise from the actions of third parties against the Bank. Most frequently, this involved events related to banking cards and cash. Internal fraud arises from actions committed by the Bank's employees and such events happen less frequently.
 
Nonetheless, fraudsters are adopting new techniques and approaches to exploit various possibilities to illegally obtain funds. Therefore, unless properly monitored and managed, the potential impact can become material.
 
 
 
Risk mitigation
The Group actively monitors, detects and prevents risks arising from fraud events. There are permanent monitoring processes in place for the timely detection of unusual activities. The risk and control self-assessment exercise focuses on identifying residual risks in key processes, subject to respective corrective actions. Given our continuous efforts to monitor and mitigate fraud risks, together with the high sophistication of our internal processes, the Bank ensures timely identification and control of fraud-related activities.
 
 
 
Statement of Directors' Responsibilities
Each of the Directors (the names of whom are set out below) confirm that to the best of their knowledge that:
·      The condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union;
·      The interim management report herein includes a fair review of the information required by Disclosure Guidance and Transparency Rules 4.2.7R and 4.2.8R namely:
o an indication of important events that have occurred during the six months ended 30 June 2018 and their impact on the condensed consolidated interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
o any related party transactions in the six months ended 30 June 2018 that have materially affected the financial position or performance of TBC Bank during that period and any changes in the related party transactions described in the last Annual Report that could have a material effect on the financial position or performance of TBC Bank in the six months ended 30 June 2018.
 
Signed on behalf of the Board by:
 




Vakhtang Butskhrikidze         


Giorgi Shagidze




 
CEO


 
Deputy CEO, CFO




 
18 August 2018


 
18 August 2018




 


 




 
TBC Bank Group PLC Board of Directors:


 




 


 




Chairman


Deputy Chairman




Mamuka Khazaradze


Badri Japaridze




 


 




Executive Directors


Non-executive Directors




Vakhtang Butskhrikidze (CEO)         


Nikoloz Enukidze (SID)




Giorgi Shagidze (CFO)


Stefano Marsaglia




 


Nicholas Dominic Haag




 
 


Eric J. Rajendra
Stephan Wilcke




 


 




-
 
 
TBC BANK GROUP PLC
 
International Financial Reporting Standards
Condensed Consolidated Interim Financial
Information (Unaudited)
 
 
30 June 2018
 

 

 
Contents
 
 
Independent review report
 
Unaudited Condensed Consolidated Interim Financial Information
 
Condensed Consolidated Interim Statement of Financial Position ................................................................................................... 60
Condensed Consolidated Interim Statement of Profit or Loss and Other Comprehensive Income.................................................. 61
Condensed Consolidated Interim Statement of Changes in Equity................................................................................................... 64
Condensed Consolidated Interim Statement of Cash Flows............................................................................................................. 65
Notes to the Condensed Consolidated Interim Financial Statements................................................................................................ 67
 

 

Independent review report to TBC Bank Group plc
Report on the condensed consolidated interim financial information
Our conclusion
We have reviewed TBC Bank Group plc's condensed consolidated interim financial information (the "interim financial statements") in the 1H and 2Q Financial Results of TBC Bank Group plc for the 6 month period ended 30 June 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
·      the condensed consolidated interim statement of financial position as at 30 June 2018;
·      the condensed consolidated interim income statement and consolidated statement of comprehensive income for the period then ended;
·      the condensed consolidated interim statement of cash flows for the period then ended;
·      the condensed consolidated interim statement of changes in equity for the period then ended; and
·      the explanatory notes to the interim financial statements.
The interim financial statements included in the 1H and 2Q Financial Results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Resposnibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The 1H and 2Q Financial Results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the 1H and 2Q Financial Results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial statements in the 1H and 2Q Financial Results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the 1H and 2Q Financial Results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
20 August 2018

 
                  TBC Bank Group PLC
                  Condensed Consolidated Interim Statement of Financial Position





 


 


30 June 2018


31 December 2017




In thousands of GEL


Note


(Unaudited)


 




 


 


 


 




Assets


 


 


 




Cash and cash equivalents


4


 1,605,163


1,431,477




Due from other banks


5


 42,469


39,643




Mandatory cash balances with the National Bank of Georgia


6


 1,034,177


1,033,818




Loans and advances to customers


7


 8,574,580


8,325,353




Investment securities available for sale


 


-


657,938




Investment securities measured at fair value through other comprehensive income


 


 817,876


-




Bonds carried at amortized cost


 


 477,694


449,538




Investments in associates


 


 1,925


1,278




Investments in finance leases


 


172,027


143,836




Investment properties


 


78,094


79,232




Current income tax prepayment


 


7,369


 19,084




Deferred income tax asset


 


2,331


 2,855




Other financial assets


 


107,741


146,144




Other assets


 


171,046


156,651




Premises and equipment


8


374,414


366,913




Intangible assets


8


87,947


83,492




Goodwill


 


28,657


28,658




 


 


 


 




 


 


 


 




Total assets


 


13,583,510


12,965,910




 


 


 


 




 


 


 


 




Liabilities


 


 


 




 


 


 


 




Due to credit institutions


9


3,097,602


2,620,714




Customer accounts


10


7,932,585


7,816,817




Other financial liabilities


 


88,320


91,753




Current

 income tax liability


 


26


447




Debt securities in issue


 


19,641


20,695




Deferred income tax liability


21


22,980


602




Provisions for liabilities and charges


11


11,732


13,200




Other liabilities


 


69,364


84,440




Subordinated debt


12


397,576


426,788




 


 


 


 




 


 


 


 




Total liabilities


 


11,639,826


11,075,456




 


 


 


 




 


 


 


 




EQUITY


 


 


 




Share capital


13


1,650


1,605




Share premium


13


796,808


714,651




Retained earnings


 


1,261,578


1,232,865




Group reorganisation reserve


 


(162,166)


(162,166)




Share based payment reserve


14


(21,085)


9,828




Revaluation reserve for premises


 


64,962


70,045




Fair value reserve


 


2,541


1,730




Cumulative currency translation reserve


 


(7,345)


(7,359)




 


 


 


 




 


 


 


 




Net assets attributable to owners


 


1,936,943


1,861,199




Non-controlling interest


 


6,741


29,255




 


 


 


 




 


 


 


 




Total equity


 


1,943,684


1,890,454




 


 


 


 




 


 


 


 




Total liabilities and equity


 


13,583,510


12,965,910




 


 


 


 




 
The financial statements on pages 60 to 123 were approved by the Board of Directors on 20 August 2018 and signed on its behalf by:



______________________________                                     ______________________________
Vakhtang Butskhrikidze                                                                  Giorgi Shagidze

Chief Executive Officer                                                                      Chief Financial Officer

 

 


 
                
                TBC Bank Group PLC
                Condensed Consolidated Interim Statement of Profit or Loss and Other Comprehensive Income





 


 


 
Six months ended




 


 


30 June 2018


30 June 2017




In thousands of GEL


Note


(Unaudited)


(Unaudited)




 


 


 


 




Interest income


17


598,001


487,667




Interest expense


17


(234,394)


(195,593)




 


 


 


 




 


 


 


 




Net interest income


 


363,607


292,074




 


 


 


 




 


 


 


 




Fee and commission income


18


109,099


89,719




Fee and commission expense


18


(35,017)


(34,502)




 


 


 


 




 


 


 


 




Net fee and commission income


 


74,082


55,217




 


 


 


 




 


 


 


 




Net insurance premiums earned


 


10,602


6,382




Net insurance claims incurred and agents' commissions


 


 (5,303)


(3,301)




 


 


 


 




 


 


 


 




Insurance Profit


 


5,299


3,081




 


 


 


 




 


 


 


 




Net income from foreign currency operations


 


 38,782


43,392




Net gains from foreign exchange translation


 


 4,023


2,037




Net gains/(losses) from derivative financial instruments


 


 413


(38)




Other operating income


19


 10,263


14,234




Share of profit of associates


 


 648


577




 


 


 


 




 


 


 


 




Other operating non-interest income


 


54,129


60,202




 


 


 


 




 


 


 


 




Provision for loan impairment


7


 (65,980)


(40,367)




Provision for  impairment of investments in finance lease


 


 (493)


(129)




(Provision for)/recovery of provision for performance guarantees and credit related commitments


11


 (2,500)


1,547




Provision for  impairment of other financial assets


 


 (5,469)


(4,425)




Impairment of investment securities measured at fair value through other comprehensive income


 


 (112)


-  




 


 


 


 




 


 


 


 




Operating income after provisions for impairment


 


422,563


367,200




 


 


 


 




 


 


 


 




Staff costs


 


 (102,847)


(102,376)




Depreciation and amortisation


8


 (21,463)


(17,523)




Recovery of liabilities and charges


 


 -  


2,495




Administrative and other operating expenses


20


 (58,712)


(58,446)




 


 


 


 




 


 


 


 




Operating expenses


 


(183,022)


(175,850)




 


 


 


 




 


 


 


 




Profit before tax


 


239,541


191,350




 


 


 


 




 


 


 


 




Income tax expense


21


(39,578)


(14,935)




 


 


 


 




 


 


 


 




Profit for the period


 


199,963


176,415




 


 


 


 




Other comprehensive income:
Items that may be reclassified subsequently to profit or loss:


 


 


 




Movement in fair value reserve


 


 827


-




Revaluation of available-for-sale investments


 


-


2,613




Exchange differences on translation to presentation currency


 


14  


(158)




Items that will not be reclassified to profit or loss:


 


 


 




Income tax recorded directly in other comprehensive income


 


(5,151)


(422)  




 


 


 


 




 


 


 


 




Other comprehensive income for the period


 


(4,310)


2,033




 


 


 


 




 


 


 


 




Total comprehensive income for the PERIOD


 


195,653


178,448




 


 


 


 




 


 


 


 




 
 
TBC Bank Group PLC
Condensed Consolidated Interim Statement of Profit or Loss and Other Comprehensive Income
 




 


 


 
Six months ended




 


 


30 June 2018


30 June 2017




In thousands of GEL


Note


(Unaudited)


(Unaudited)




 


 


 


 




Profit is attributable to:


 


 


 




- Shareholders of TBCG


 


198,347


173,5199




- Non-controlling interest


 


1,616


2,896




 


 


 


 




Profit for the period


 


199,963


176,415




 


 


 


 




 


 


 


 




Total comprehensive income is attributable to:


 


 


 




- Shareholders of TBCG


 


194,089


175,523




- Non-controlling interest


 


 1,564


2,925




 


 


 


 




 


 


 


 




Total comprehensive income for the period


 


195,653


178,448




 


 


 


 




 


 


 


 




Earnings per share for profit attributable to the owners of the Group:


 


 


 




- Basic earnings per share


15


3.70


3.31




- Diluted earnings per share


15


3.67


3.26




 


 


 


 



 
 
 
 
 
 



 
 
 

 





In thousands of GEL


Note


 


 




Net assets attributable to owners


Non-control-ling interest


Total
 equity




Share
capital


Share pre-mium


Group reorganisation reserve


Share based payments reserve


Revaluation reserve for premises


Revaluation reserve for Available for sale securities


Fair value reserve[15]


Cumulative currency translation reserve


Retained
earnings


Total






 


 


 


 


 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 


 


 


 


 




 
Balance as of 1 January 2017
 


 


1,581


  677,211


(162,166)


23,327


70,460


(3,681)


-


(7,538)


955,173


1,554,367


28,264


1,582,631




 


 


 


 


 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Profit for the six months ended 30 June 2017 (unaudited)


 


-


-


-


                -


-


-


-


-


173,519


173,519


2,896


176,415




Other comprehensive income/(loss) for six months ended 30 June 2017 (unaudited)


 


-


-


-


-


(415)


2,575


-


 (156)


-


2,004


29


2,033




 


 


 


 


 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Total comprehensive income/(loss) for six months ended 30 June 2017 (unaudited)


 


-


-


-


-


(415)


2,575


-


 (156)


173,519


175,523


2,925


178,448




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Share issue


 


16


24,237


-


(24,253)


-


-


-


-


-


-


-


-




Share based payment accrual


14


 -  


 -  


-


5,679


-


-


-


-


-


5,679


(278)


5,401




Conversion of shares


 


4


5,132


-


-


-


-


-


-


(1,909)


3,227


(3,196)


31




Dividends declared


 


-


-


-


-


-


-


-


-


(74,810)


(74,810)


(1,193)


(76,003)




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Balance as of 30 June 2017 (unaudited)


 


 1,601


706,580


     (162,166)


4,753


70,045


(1,106)


-


 (7,694)


1,051,973


1,663,986


26,522


1,690,508




 


 


 


 


 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Balance as of 31 December 2017


 


1,605


714,651


(162,166)


9,828


70,045


1,730


-


(7,359)


1,232,865


1,861,199


29,255


1,890,454




 


 


 


 


 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Impact of adopting IFRS 9 as at 1 January 2018


2


-


-


-


-


-


-


-


-


(62,928)


(62,928)


(719)


(63,647)




 


 


 


 


 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Balance as at 1 January 2018 (unaudited)


 


1,605


714,651


(162,166)


9,828


70,045


-


1,730


(7,359)


1,169,937


1,798,271


28,536


1,826,807




 


 


 


 


 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Profit for the six months ended 30 June 2018 (unaudited)


 


-


-


-


-


-


-


-


-


198,347


198,347


1,616


199,963




Other comprehensive income/(loss) for six months ended 30 June 2018 (unaudited)


 


-


-


-


-


(5,083)


-


811


  14


-


(4,258)


(52)


(4,310)




 


 


 


 


 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Total comprehensive income/(loss) for six months ended 30 June 2018 (unaudited)


 


-


-


-


-


(5,083)


-


811


14


198,347


194,089


1,564


195,653




 


 


 


 


 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Share issue


 


23


41,984


-


(38,670)


-


-


-


-


-


3,337


-


3,337




Share based payment accrual


14


 -  


 -  


-


7,757


-


-


-


-


-


7,757


(885)


6,872




Conversion of shares


 


22


40,173


-


-


-


-


-


-


(17,837)


22,358


(22,358)


-




Dividends declared


 


-


-


-


-


-


-


-


-


(88,869)


(88,869)


(116)


(88,985)




 


 


 


 


 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 


 


 


 


 




Balance as of 30 June 2018 (unaudited)


 


  1,650


796,808


    (162,166)


(21,085)


64,962


-


2,541


(7,345)


1,261,578


1,936,943


6,741


1,943,684




 


 


 


 


 


 


 


 


 


 


 


 


 


 



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




 





 


 


Six months ended




 
In thousands of GEL


Note


30 June 2018 (Unaudited)


30 June 2017 (Unaudited)




 


 


 


 






Cash flows from/(used in) operating activities


 


 


 




Interest received


 


573,644


468,391




Interest paid


 


(234,845)


(195,640)




Fees and commissions received


 


118,805


89,329




Fees and commissions paid


 


(35,025)


(34,802)




Insurance premium received


 


10,973


7,153




Insurance claims paid


 


(5,898)


(3,497)




Income received from trading in foreign currencies


 


38,782


43,392




Other operating income received


 


(2,672)


8,334




Staff costs paid


 


(111,715)


(102,975)




Administrative and other operating expenses paid


 


(59,836)


(53,075)




Income tax paid


 


(10,151)


(21,785)




 


 


 


 




 


 


 


 




Cash flows from operating activities before changes in operating assets and liabilities


 


282,062


204,825




 


 


 


 




 


 


 


 




Net change in operating assets


 


 


 




Due from other banks and mandatory cash balances with the National Bank of Georgia


 


(51,957)


3,043




Loans and advances to customers


 


(671,825)


(499,822)




Investment in finance lease


 


(34,101)


(8,531)




Other financial assets


 


40,231


1,007




Other assets


 


(879)


1,103




Net change in operating liabilities


 


 


 




Due to other banks


 


126,870


(223,686)




Customer accounts


 


430,568


610,920




Other financial liabilities


 


(10,995)


(8,600)




Other liabilities and provision for liabilities and charges


 


(215)


(211)




 


 


 


 




 


 


 


 




Net cash flows from operating activities


 


109,759


80,048




 


 


 


 




 


 


 


 




Cash flows from/(used in) investing activities


 


 


 




Acquisition of investment securities measured at fair value through other comprehensive income


 


(395,898)


-




Acquisition of investment securities available for sale


 


-


(401,304)




Proceeds from redemption at maturity of investment securities measured at fair value through other comprehensive income


 


239,593


-




Proceeds from redemption at maturity of investment securities available for sale


 


-


218,981




Acquisition of bonds carried at amortised cost


 


(166,188)


(141,849)




Proceeds from redemption of bonds carried at amortised cost


 


142,432


131,693




Acquisition of premises, equipment and intangible assets


 


(34,241)


(32,262)




Disposal of premises, equipment and intangible assets


 


1,015


1,506




Proceeds from disposal of investment property


 


6,898


2,570




Acquisition of subsidiaries and associates


 


-


(350)




 


 


 


 




 


 


 


 




Net cash used in investing activities


 


(206,389)


(221,015)




 


 


 


 




 


 


 


 




Cash flows from/(used in) financing activities


 


 


 




Proceeds from other borrowed funds


 


1,468,097


1,019,147




Redemption of other borrowed funds


 


(1,044,435)


(640,409)




Proceeds from subordinated debt


 


-


52,990




Redemption of subordinated debt


 


(7,688)


-  




Proceeds from debt securities in issue


 


28


2,823




Dividends paid


13


(85,484)


(1,193)




Issue of ordinary shares


 


-


31




 


 


 


 




 


 


 


 




Net cash flows from financing activities


 


330,518


433,389




 


 


 


 




 


 


 


 




Effect of exchange rate changes on cash and cash equivalents


 


(60,202)


(18,494)




 


 


 


 




 
 


 


 


 




Net increase in cash and cash equivalents


 


173,686


273,928




 


 


 


 




Cash and cash equivalents at the beginning of the period


4


1,431,477


945,180




 


 


 


 




 


 


 


 




Cash and cash equivalents at the end of the period


4


1,605,163


1,219,108




 


 


 


 





 

1       Introduction
Principal activity.  TBC Bank Group PLC ("TBCG") is a public limited liability company, incorporated in England and Wales. TBCG held 99.88% of the share capital of JSC TBC Bank (hereafter the "Bank") as at 30 June 2018 (31 December 2017: 98.67%), thus representing the Bank's ultimate parent company. Together with the Bank and subsidiaries, TBCG makes up a group of companies. The Bank is a parent of a group of companies incorporated in Georgia and Azerbaijan, their primary business activities include providing banking, leasing, brokerage and card processing services to corporate and individual customers.
The shares of TBCG ("TBCG Shares") were admitted to the Premium Listing segment of the Official List of the UK Listing Authority and admitted to trading on the London Stock Exchange PLC's Main Market for listed securities effective on 10 August 2016 (the "Admission", Note13). TBC Bank Group PLC's registered legal address is 6 St. Andrew Street, London, United Kingdom EC4A 3AE. Registered number of TBC Bank Group PLC is 10029943. The Bank is the Group's main operating unit and it accounts for most of the Group's activities.
JSC TBC Bank was incorporated on 17 December 1992 and is domiciled in Georgia. The Bank is a joint stock company limited by shares and was set up in accordance with Georgian regulations. The Bank's registered address and place of business is 7 Marjanishvili Street, 0102 Tbilisi, Georgia.
The Bank's principal business activity is universal banking operations that include corporate, small and medium enterprises, retail and micro operations within Georgia. In 2018, the Bank launched fully-digital bank, Space. The Bank has been operating since 20 January 1993 under a general banking license issued by the National Bank of the Georgia ("NBG").
The Group had 149 branches and 7,065 employees within Georgia as at 30 June 2018 (30 June 2017: 157 branches and 6,898 employees).
 
As of 30 June 2018 and 31 December 2017, the following shareholders directly owned more than 5% of the total outstanding shares of the Group. Other shareholders individually owned less than 5% of the outstanding shares. As of 30 June 2018 and 31 December 2017 the Group had no ultimate controlling party. Other includes individual as well as corporate shareholders.




Shareholders


 
 
 
 


30 June 2018

Ownership interest


31 December 2017

Ownership interest




 


 


 


 




European Bank for Reconstruction and Development


 


8.18%


8.38%




JPMorgan Asset Management


 


         9.03%


9.21%




Schroder Investment Management


 


8.03%


9.53%




Mamuka Khazaradze*


 


6.19%


6.35%




Badri Japaridze*


 


6.08%


6.23%




Liquid Crystal International N.V. LLC


 


5.64%


5.78%




Other


 


56.85%


54.52%




 


 


 


 




 


 


 


 




Total


 


100.00%


100.00%




 


 


 


 




* Represents direct ownership of the shares for Mamuka Khazaradze and Badri Japaridze. Mamuka Khazaradze has beneficial ownership of 13.54% and Badri Japaridze has beneficial ownership of 6.77%
 
 
 
 
1    Introduction (Continued)
The condensed consolidated interim financial statements include the following principal subsidiaries:




 
Company Name


Proportion of voting rights and ordinary share capital


 


 


 




30 June 2018


31 December 2017


Principal place of business or incorporation


Year of incorpo-ration


Industry




 


 


 


 


 


 




JSC TBC Bank


99.88%


98.67%


Tbilisi, Georgia


1992


Banking




United Financial Corporation JSC


98.67%


98.67%


Tbilisi, Georgia


1997


Card processing




TBC Capital LLC


100.00%


100.00%


Tbilisi, Georgia


1999


Brokerage




TBC Leasing JSC


99.61%


99.61%


Tbilisi, Georgia


2003


Leasing




TBC Kredit LLC


75.00%


75.00%


Baku, Azerbaijan


1999


Non-banking credit institution




Banking System Service Company LLC


100.00%


100.00%


Tbilisi, Georgia


2009


Information services




TBC Pay LLC


100.00%


100.00%


Tbilisi, Georgia


2009


Processing




Real Estate Management Fund JSC


100.00%


100.00%


Tbilisi, Georgia


2010


Real estate management




TBC Invest LLC


100.00%


100.00%


Ramat Gan, Israel


2011


PR and marketing




Index LLC


100.00%


100.00%


Tbilisi, Georgia


2011


Real estate management




JSC TBC Insurance


100.00%


100.00%


Tbilisi, Georgia


2014


Insurance




 


 


 


 


 


 




 
The consolidated financial statements include the following associates:
 




Company Name


Proportion of voting rights and ordinary share capital held as of 30 June


Principal place of business or incorporation


Year of incorpo-ration


Industry




2018


2017


 


 


 




JSC CreditInfo Georgia


21.08%


21.08%


Tbilisi, Georgia


2005


Financial intermediation




LLC Online Tickets


26.00%


26.00%


Tbilisi, Georgia


2015


Computer and Software Services




 


 


 


 


 


 




The country of registration or incorporation is also the principal area of operation of each of the above subsidiaries. On 8 May 2017 the Group completed the legal and operational process of merging JSC Bank Republic with the Bank.
The Group's corporate structure consists of a number of related undertakings, comprising subsidiaries and associates, which are not consolidated due to immateriality. A full list of these undertakings, the country of incorporation and the ownership of each share class is set out below.[1]
 




 
Company Name


Proportion of voting rights and ordinary share capital


 


 


 




30 June
2018


31 December 2017


Principal place of business or incorporation


Year of incorpo-ration


Industry




 


 


 


 


 


 




UFC International Ltd*


0.00%


80.00%


British Virgin Islands


2001


Investment Vehicle




TBC Capital B.V.


90.00%


90.00%


Amsterdam, Netherlands


2007


Investment Vehicle




TBC Invest International Ltd


100.00%


100.00%


Tbilisi, Georgia


2016


Investment Vehicle




University Development Fund


33.33%


33.33%


Tbilisi, Georgia


2007


Education




Ltd Georgian Mill Company


100.00%


100.00%


Tbilisi, Georgia


2010


Manufacturing




 


 


 


 


 


 




*Liquidated in 2018


 


 


 


 


 




2        Summary of Significant Accounting Policies, Critical Accounting Estimates, and Judgements in Applying Accounting Policies
2.1 Basis of preparation
These condensed consolidated interim financial statements for the six months ended 30 June 2018 for TBC Bank Group PLC and its subsidiaries (together referred to as the "Group") has been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority and IAS 34 Interim Financial Reporting as adopted by the European Union. These condensed consolidated interim financial statements do not include all the notes of the type normally included in an annual consolidated financial statements. Accordingly, this report is to be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2017, which have been prepared in accordance with IFRSs as adopted by the European Union and any public announcements made by TBC Bank Group PLC during the interim reporting period.
The same accounting policies and methods of computation were followed in the preparation of these condensed consolidated interim financial statements as used in the preparation of the annual consolidated financial statements for the year ended 31 December 2017, except for the adoption of new standards effective as of 1 January 2018. The nature and the impact of each amendment is described below in 2.3 and 2.4 in this note.
The condensed consolidated interim financial statements are presented in thousands of Georgian Lari ("GEL thousands"), except per-share amounts and unless otherwise indicated.
These condensed consolidated interim financial statements has been reviewed, not audited. Auditor's review conclusion is included in this report.
Going Concern. The Board of Directors of TBC Bank Group PLC has prepared these condensed consolidated interim financial statements on a going concern basis. In making this judgement, management considered the Group's financial position, current intentions, profitability of operations and access to financial resources. Management is not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern.
Interim period tax measurement. Interim period income tax expense is accrued using the effective tax rate that would be applicable to expected total annual earnings, that is, the estimated weighted average annual effective income tax rate applied to the pre-tax income of the interim period.
Foreign currency translation. At 30 June 2018  the closing rate of exchange used for translating foreign currency balances was USD 1 = GEL 2.4516(31 December 2017: USD 1 = GEL 2.5922); EUR 1 = GEL 2.8537 (31 December 2017: EUR 1 = GEL 3.1044); GBP 1 = GEL 3.2209 (31 December 2017: GBP 1 = GEL 3.5005).
2.2 Critical accounting estimates, and judgements in applying accounting policies
Deferred and current income tax. On 13 May 2016 the Government of Georgia enacted the changes in the Tax Code of Georgia effective from 1 January 2019, for commercial banks, credit unions, insurance organizations, microfinance organizations and pawnshops and from 1 January 2017 for other entities. The new code impacts the recognition and measurement principles of the Group's income tax and it also affects the Group's deferred income tax assets/liabilities. Companies do not have to pay income tax on their profit before tax (earned since 1 January 2017 or 1 January 2019 for commercial banks, credit unions, insurance organizations, microfinance organizations and pawnshops) until that profit is distributed in a form of dividend or other forms of profit distributions. Once a dividend is paid, 15% income tax is payable at the moment of the dividend payment, regardless of whether in monetary or non-monetary form, to the foreign non-resident legal entities and foreign and domestic individuals. The dividends paid out to the resident legal entities are tax exempted. Apart from dividend' distribution, the tax is still payable on expenses or other payments incurred not related to economic activities, free delivery of goods/services and/or transfer of funds and representation costs that exceed the maximum amount determined by the Income Tax Code of Georgia, in the same month they are incurred.
Following the above resolution, on 12 June 2018 the new amendment came into force that postpones above mentioned tax relief for re-invested profit from 1 January 2019 to 1 January 2023 for commercial banks, credit unions, insurance organizations, microfinance organizations and pawnshops. As a result, as of 30 June 2018, deferred tax assets and liabilities are re-measured to the amounts that are estimated to be utilized in the period from 1 July 2018 to 31 December 2022. Refer to Note 21.
Impairment losses on loans and advances and finance lease receivables. For details please refer to Impairment of financial assets under IFRS 9 section below.

 
2    Summary of Significant Accounting Policies, Critical Accounting Estimates, and Judgements in Applying Accounting Policies (Continued)
2.3 Initial application of IFRS 9
 
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018. The Group has not restated comparative information for 2017 for financial instruments in the scope of IFRS 9. Therefore, the comparative information for 2017 is reported under IAS 39 and is not comparable to the information presented for 2018. Differences arising from the adoption of IFRS 9 have been recognised directly in retained earnings as of 1 January 2018 and are disclosed below.
 
Classification and measurement
 
Under IFRS 9 Financial Instruments, all debt financial assets that do not meet "solely payment of principal and interest" (SPPI) criteria, are classified at initial recognition as fair value through profit or loss (FVPL). Under these criteria, debt instruments that do not correspond to a "basic lending arrangement" are measured at FVPL. For debt financial assets that meet the SPPI criteria, classification at initial recognition is determined based on the business model, under which these instruments are managed:
 
·      debt  financial assets that are managed on a "hold to collect" basis are measured at amortised cost;
·      debt financial assets that are managed on a "hold to collect and sale" basis are measured at fair value through other comprehensive income (FVOCI);
·      debt financial assets that are managed on other basis, including trading financial assets, are measured at FVPL.
Equity financial assets are required to be classified at initial recognition as FVPL unless an irrevocable designation is made to classify the instrument as FVOCI. For equity investments classified as FVOCI, all realised and unrealised gains and losses, except for dividend income, are recognised in other comprehensive income with no subsequent reclassification to profit and loss.
The Group has updated previous measurement categories in accordance with IAS 39 into their new measurement categories upon transition to IFRS 9 on 1 January 2018. The table is disclosed below in this note.
Impairment of financial assets
 
Staged approach for the Determination of the Expected credit losses
Per IFRS 9 the Group classifies its borrowers across three stages:
·      The Bank classifies its exposures as Stage 1 if no significant deterioration in credit quality occurred since initial recognition and the instrument was not credit-impaired when initially recognized
·      The exposure is classified to Stage 2 if the significant deterioration in credit quality was identified since initial recognition but the financial instrument is not considered credit-impaired
·      The exposures for which the credit-impaired indicators have been identified are classified as Stage III instruments
 
The Expected Credit Loss (ECL) amount differs depending on exposure allocation to one of the Stages. In the case of Stage I instruments, the ECL represents that portion of the lifetime ECL that can be attributed to default events occurring within the next 12 months from the reporting date. In case of Stage II instruments, the ECL represents the lifetime ECL, i.e. credit losses that can be attributed to possible default events during the whole lifetime of a financial instrument. In case of Stage III instruments, default event has already incurred and the lifetime ECL is estimated based on the expected recoveries.
 
2    Summary of Significant Accounting Policies, Critical Accounting Estimates, and Judgements in Applying Accounting Policies (Continued)
2.3 Initial application of IFRS 9 (continued)
Significant increase in credit risk
The assessment of the significant credit deterioration is key as it determines when to move exposure from the 12 months to lifetime expected credit losses. The Bank applies both quantitative and the qualitative SICR criteria including, but not limited to:
•     Downgrade of the risk category of the borrower since initial recognition
•     Deterioration of the probability of default parameter above the predefined threshold
•     Restructuring status of the exposure
•     More than 30 days past due ("DPD") 
The Exposure is assigned to stage 2 if at least one SICR indicator is identified after initial recognition and the financial instrument is not classified as credit-impaired, i.e. moved to stage 3. Financial instrument can be reclassified to Stage 1 if SICR indicators are no longer identified and the financial instrument is not classified as credit-impaired.
All of the SICR (significant increase in credit risks) indicators are recognized at financial instrument level in order to track changes in credit risk since initial recognition date, even though some of them refer to the borrower's characteristics. Example of the borrower based SICR indicator is "Downgrade of the risk category of the borrower since initial recognition". This criteria is mainly used for corporate and SME borrowers, where the Bank based on the results of the monitoring classifies individual borrowers across different internal risk category. If the borrower's internal risk category deteriorates compared to the initial recognition and is not considered as credit impaired, it is transferred to stage 2. 
In case of the retail and micro segments, where the Bank has significant number of observation, the Bank uses changes in probability of default parameter for each individual exposure as one of the criteria to classify exposure in stage 2.
 
Credit impaired financial assets
During IFRS 9 implementation process the Bank updated its default definition to make it consistent with the Bank's internal guidelines. 
Updated default definition includes criteria such as more than 90 days past due ("DPD") and (ii) other criteria indicating the borrower's unlikeliness to repay the liabilities. In case of individually significant borrowers the Bank additionally applies criteria included by not limited to: bankruptcy proceedings, significant fraud in the borrower's business that significantly affected its financial conditional, and breach of the contract terms.
For Corporate and SME business borrowers the Bank applies borrower based default definition, meaning that if any exposure to the borrower is considered defaulted; the Bank considers all of exposures to this borrower as defaulted.
As for the retail and macro segments facility level default definition is utilized with additional pulling effect criteria being applied. If for the borrower the amount of defaulted exposures exceeds predefined threshold, the Bank considers all of the exposures associated with the borrower as defaulted.
The exposures that are considered defaulted (credit impaired) are classified to stage 3 and lifetime ECL is calculated.
Defaulted exposure may be reclassified as non-defaulted again and transferred to stage 2 if default exit conditions are met. Exposures which are moved to stage 2 from default state are kept there for certain period before transferring to stage 1 and classified as fully performing loan again.
 
 
2    Summary of Significant Accounting Policies, Critical Accounting Estimates, and Judgements in Applying Accounting Policies (Continued)
2.3 Initial application of IFRS 9 (continued)
Expected credit loss estimation
For the stage 3 ECL calculation purposes the Bank differentiates between individually significant and non-significant exposures. In case of the stage III significant borrowers the Bank estimates ECL on an individual basis using the discounted cash flow model. As for the non - significant stage III borrowers collective assessment is utilized. As for the stage I and stage II exposures the Bank estimates expected credit losses collectively.
For the collective assessment and risk parameters estimation purposes the exposures are grouped into a homogenous risk pools based on similar credit risk characteristics. Common credit risk characteristics of the group include but are not limited to: Stage (stage 1, Stage 2 or stage 3), type of counterparty (individual vs business), type of product, rating (external or internal), overdue status, restructuring status, months in default category or any  other characteristics that may differentiate certain sub-segments for risk parameter's estimation purposes.
Number of pools differs for different products/ segments considering specifics of portfolio and availability of data within each pool. The expected value of credit losses for a particular portfolio is equal to the product of the risk parameters related to this portfolio, i.e.:
•     Exposure at Default parameter (EAD) - representing expected gross exposure amount at the time of default event occurring;
•     Marginal Probability of Default parameter (MPD) - representing probability that the performing contract defaults during particular time period and exactly in this time period[16], and
•     Loss Given Default parameter (LGD) - representing the share of the exposure that is lost if a default event occurs
The specific equations for the Expected Credit Loss (ECL) amount differ depending on exposure allocation to one of the Stages. Additionally, in case of the stage 2 exposures lifetime determination is significant as it identifies the time horizon over which the expected credit losses (ECL) for a financial instrument are calculated. Factors such as existence of contractual repayment schedules, options for extension of repayment maturity and monitoring processes held by the Bank affect the lifetime determination process.
 
The Bank arrives at final estimate of the ECL taking into account a range of macroeconomic scenarios. The final ECL estimate used for the loss allowance calculation represents an ECL amount that reflects the probabilities of specific scenarios occurring.
 
Incorporation of the forward looking information:
For forward looking information purposes the Bank defines three macro scenarios. The scenarios are defined as baseline (most likely), upside (better than most likely) and downside (worse than most likely) scenarios of the state of the Georgian economy with certain probabilities of respective scenarios occurring attached.
The Bank derives the baseline macro scenario and takes into account projections from various external sources - the National Bank of Georgia, Ministry of Finance, International Monetary Fund ("IMF") as well as other International Financial Institutions ("IFI"'s) - to ensure the alignment to the consensus market expectations. Upside and downside scenarios are defined based on the framework developed by the Bank's macroeconomic unit.
 
 
2    Summary of Significant Accounting Policies, Critical Accounting Estimates, and Judgements in Applying Accounting Policies (Continued)
2.3 Initial application of IFRS 9 (continued)
 
Gross carrying amount and write offs
 
Gross carrying amount of a financial asset is the amortised cost of a financial asset, before adjusting for any loss allowance. The bank directly reduces the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof.
 
Effective interest method
 
Interest revenue is calculated by using the effective interest method. This shall be calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for credit impaired financial assets (Stage 3) for which interest income is calculated by applying the effective interest rate to the amortised cost (i.e. the gross carrying amount less credit loss allowance).
 
Derecognition and modification criteria
 
The Standard (IFRS 9) provides guidance related to modifications of financial assets (as a result of renegotiation or due to other reason). However, standard does not provide exact criteria to define in which case financial assets can be treated as modified or derecognized.
Based on below shown internally developed methodology there are certain qualitative triggers which lead to asset derecognition with no further quantitative testing required. Main qualitative criteria are included in the list below:
•     Change of contract currency;
•     Consolidation of two or more loans into one new loan;
•     Change in counterparty;
•     Loan with no schedule is replaced with loan with schedule or vice versa;
•     Change of agreement interest rate because of market environment changes;
 
IFRS 9 does not specify explicitly qualitative/quantitative criteria for derecognition of financial assets. It is up to the Bank's decision to define the set of criteria that trigger significant modification of financial asset and thus leads to its derecognition. In all other cases, it should be assessed whether change in contractual cash flow is significant (significance defined as 10% change). If the test result is above 10% threshold, loan should be derecognized, whereas if the test is passed and result is below or equal to 10%, financial asset can be assessed as modified.
 
When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of that financial asset in accordance with this policy, the Bank recalculates the gross carrying amount of the financial asset and shall recognise a modification gain or loss in statement of profit or loss. The gross carrying amount of the financial asset shall be recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset's original effective interest rate or, when applicable, the revised effective interest rate. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset.
 
 
Effect of transition to IFRS 9
 
IFRS 9 does not have any impact on Bank's regulatory capital and capital adequacy ratios, which are calculated using local regulatory reporting guidelines.
 
 
 
2    Summary of Significant Accounting Policies, Critical Accounting Estimates, and Judgements in Applying Accounting Policies (Continued)
2.3 Initial application of IFRS 9 (continued)
 
Effect of transition to IFRS 9 (continued)
 
The following table reconciles the carrying amounts of financial assets from their previous measurement categories in accordance with IAS 39 into their new measurement categories upon transition to IFRS 9 on 1 January 2018:




In thousands of GEL


Measurement category


Carrying value per

 IAS 39
(closing balance at

31 December 2017)


Effect


Carrying value per IFRS 9
(opening balance at

1 January 2018)




IAS 39


IFRS 9


Remeasurement


Reclassification




ECL*


Other


Mandatory


Voluntary




 


 


 


 


 


 


 


 


 






Cash and cash equivalents


Loans and receivables


Amortised cost


1,431,477


491


-


-


-


1,430,986




 


 


 


 


 


 


 


 


 




Mandatory cash balances with the National Bank of Georgia


Loans and receivables


Amortised cost


1,033,818


-


-


-


-


1,033,818




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Investments in debt securities


Available-for-sale


Fair value through other comprehensive income


656,234


1,051


-


-


-


655,183




Investments in debt securities


Loans and receivables


Amortised cost


449,538


628


-


-


-


448,910




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Total investments in debt securities


 


 


1,105,772


1,679


-


-


-


1,104,093




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Investments in equity securities


Available-for-sale


Fair value through other comprehensive income


1,704


-


-


-


-


1,704




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Total investments in equity securities


 


 


1,704


-


-


-


-


1,704




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Due from other banks


Loans and receivables


Amortised cost


39,643


36


-


-


-


39,607




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Loans and advances to customers


Loans and receivables


Amortised cost


8,325,353


63,731


-


-


-


8,261,622




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Total loans and advances to customers


 


 


8,325,353


63,731


-


-


-


8,261,622




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Investment in Finance Lease


Finance lease receivables


Amortised cost


143,836


739


-


-


-


143,097




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Total Investment in Finance Lease


 


 


143,836


739


-


-


-


143,097




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Other financial assets


Loans and receivables


Amortised cost


146,144


1,019


-


-


-


145,125




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Total other financial assets


 


 


146,144


1,019


-


-


-


145,125




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Total financial assets


 


 


12,227,747


67,695


-


-


-


12,160,052




 


 


 


 


 


 


 


 


 




 
*Positive figures mean increase in the estimated credit loss, whilst the negative figures stand for decrease in ECL.
 
 
2    Summary of Significant Accounting Policies, Critical Accounting Estimates, and Judgements in Applying Accounting Policies (Continued)
2.3 Initial application of IFRS 9 (continued)
 
There have been release of provision level for credit related commitments and performance guarantee contracts upon transition to the IFRS 9 on 1 January 2018 in amount of GEL 4.1 million. As a result, total provision at the Group level increased by GEL 63.6 million as at 1 January 2018. There were no material changes in amounts of financial liabilities. The impact GEL 63.6 million was recognized as a reduction of retained earnings in the consolidated financial statements from the adoption of the new standard on 1 January 2018. Related tax amount has been recognised according to local tax legislation and was considered during reassessment during deferred tax amount as of the reporting date.
2.4 Initial application of IFRS 15
 
IFRS 15 Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2018). The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalized and amortized over the period when the benefits of the contract are consumed.
The Group applies IFRS 15 using modified retrospective approach, which means that comparatives are recalculated only for contracts that were not completed as at 1 January 2018. There have been no material transition effect to IFRS 15 as at 1 January 2018.
 
The Group analysed its main revenue streams under the scope of IFRS 15 which are fee and commission income from card operations, cash and settlement transactions, other operating income generated from sales of inventory, investment property, and equipment. Those revenue streams were not affected by transition to IFRS 15 as part of the revenue had already been deferred until satisfaction of the respective performance obligations and there have been no impact from adoption of IFRS 15 as at 1 January 2018. The Group will continue to accrue over period of time those incomes that are earned from services that are provided over a period of time.
2.5 Adoption of other New or Revised Standards and Interpretations
The adopted accounting policies are consistent with those of the previous financial year. There were no other new or amended standards or interpretations that resulted in a change of the accounting policy except described above.
 
3        New Accounting Pronouncements
Minor amendments to IFRSs
The IASB has published a number of minor amendments some of which has not yet been endorsed for use in the EU. The Group has not early adopted any of the amendments effective after 31 December 2017 and it expects they will have an insignificant effect, when adopted, on the consolidated financial statements of the Group.
Major new IFRSs
IFRS 16, Leases (issued on 13 January 2016 and effective for annual periods beginning on or after 1 January 2019). The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also to access financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognize: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The Group is currently assessing the impact of the new standard on its financial statements.
3    New Accounting Pronouncements (Continued)
Major new IFRSs (continued)
IFRS 17 "Insurance Contracts"(issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021). IFRS 17 replaces IFRS 4, which has given companies dispensation to carry on accounting for insurance contracts using existing practices. As a consequence, it was difficult for investors to compare and contrast the financial performance of otherwise similar insurance companies. IFRS 17 is a single principle-based standard to account for all types of insurance contracts, including reinsurance contracts that an insurer holds. The standard requires recognition and measurement of groups of insurance contracts at: (i) a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) (ii) an amount representing the unearned profit in the group of contracts (the contractual service margin). Insurers will be recognising the profit from a group of insurance contracts over the period they provide insurance coverage, and as they are released from risk. If a group of contracts is or becomes loss-making, an entity will be recognising the loss immediately. The Group is currently assessing the impact of the new standard on its financial statements.
4        Cash and Cash Equivalents




In thousands of GEL


30 June 2018


31 December 2017




 


 


 




Cash on hand


449,513


419,605




Cash balances with the National Bank of Georgia (other than mandatory reserve deposits)


378,926


371,342




Correspondent accounts and overnight placements with other banks


401,979


571,078




Placements with and receivables from other banks with original maturities of less than three months


375,182


69,452




Provision for cash and cash equivalents


(437)


-




 


 


 




 


 


 




Total cash and cash equivalents


1,605,163


1,431,477




 


 


 




As of 30 June 2018, 98% of the correspondent accounts and overnight placements with other banks are placed with OECD banking institutions (31 December 2017: 97%).
As of 30 June 2018, GEL 375,182 thousand was placed on interbank term deposits with four OECD banks and one Georgian bank (31 December 2017: GEL 12,421 thousand with one non-OECD bank and GEL 57,031 thousand with one OECD bank).
 
5        Due from Other Banks
Amounts due from other banks include placements with original maturities of more than three months that are not collateralised and do not represent past due amounts at the 30 June 2018 and 31 December 2017. As of 30 June 2018 GEL 13,192 thousand (31 December 2017: GEL 13,121 thousand) were kept on deposits as restricted cash. Refer to Note 26 for the estimated fair value of amounts due from other banks.
As of 30 June 2018 the Group had no loan issued to any bank, with original maturities of more than three months and with aggregated amounts above GEL 5,000 thousand (2017: one bank in the amount of GEL 23,147 thousand).
 
6        Mandatory cash balances with the National Bank of Georgia
Mandatory cash balances with the National Bank of Georgia ("NBG") represent amounts deposited with the NBG. Resident financial institutions are required to maintain an interest-earning obligatory reserve with the NBG, the amount of which depends on the level of funds attracted by the financial institutions. The Group earned up to 5.0%, 1.0% and (0.4%) annual interest in GEL, USD and EUR respectively on mandatory reserve with NBG in the six months ended 30 June 2018 (30 June 2017: 5.0%, 0.0% and (0.4%) in GEL, USD and EUR respectively).
In March 2018 Fitch Ratings revised the Outlook on Georgia's long-term foreign and local currency Issuer Default Ratings (IDRs) to Positive from Stable and affirmed the IDRs at 'BB-'. The issue ratings on Georgia's senior unsecured foreign- and local-currency bonds are affirmed at 'BB-'. The Country Ceiling is affirmed at 'BB' and the Short-term foreign-currency IDR at 'B'.
7        Loans and Advances to Customers




In thousands of GEL


30 June 2018


31 December 2017




 


 


 




Corporate


 2,581,612


2,475,392




Consumer


 2,010,819


2,163,425




Mortgage


 2,185,630


2,069,728




MSME


 2,117,886


1,844,672




 


 


 




Total loans and advances to customers (before impairment)


8,895,947


8,553,217




 


 


 




Less: Provision for loan impairment


(321,367)


(227,864)




 


 


 




 


 


 




Total loans and advances to customers


8,574,580


8,325,353




 


 


 




 
7        Loans and Advances to Customers (Continued)
As of 30 June 2018 loans and advances to customers carried at GEL 241,229 thousand have been pledged to local banks or other financial institutions as collateral with respect to other borrowed funds (30 June 2017: GEL 240,001  thousand).
Movements in the provision for loan impairment during the six months ended 30 June 2018 are as follows:




In thousands of GEL


Corpo-rate


Consumer


Mortgage


MSME


Total




 


 


 


 


 


 




Provision for loan impairment as of 31 December 2017


 49,626


 121,538


 17,577


 39,123


 227,864




IFRS 9 effect


 18,337


 33,032


 5,232


 7,129


 63,730




Provision for loan impairment as of 1 January 2018


67,963


154,570


22,809


46,252


291,594




Resegmentation effect


446


 (14,889)


 (21)


 14,464


 -  




Provision for impairment during the period


 3,383


 62,749


 5,402


 15,050


 86,584




Amounts written off during the period as uncollectible


 (321)


 (43,951)


 (1,922)


 (9,965)


 (56,159)




Effect of translation to presentation currency


 -  


 (106)


 (141)


 (405)


 (652)




 


 


 


 


 


 




Provision for loan impairment as of 30 June 2018


 71,471


 158,373


 26,127


 65,396


 321,367




 


 


 


 


 


 




Loans and advances to customers written off in the first half of 2018 included loans to customers in the gross amount of GEL 6,806 thousand issued in 2018 and GEL 49,353 thousand issued in previous years.
Movements in the provision for loan impairment during the six months ended 30 June 2017 were as follows:
 




In thousands of GEL


Corpo-rate


Consumer


Mortgage


MSME


Total




 


 


 


 


 


 




Provision for loan impairment as of 1 January 2017


90,100


73,730


23,602


37,591


225,023




Provision for impairment during the period


(20,823)


65,878


226


11,316


56,597




Amounts written off during the period as uncollectible


(22,721)


(34,532)


(3,248)


(8,549)


(69,050)




Effect of translation to presentation currency


-  


(78)


(90)


(272)


(440)




 


 


 


 


 


 




Provision for loan impairment as of 30 June 2017


46,556


104,998


20,490


40,086


212,130




 


 


 


 


 


 




 
7        Loans and Advances to Customers (Continued)
Economic sector risk concentrations within the customer loan portfolio are as follows:
 




 


30 June 2018


 


31 December 2017




In thousands of GEL


Amount


%


 


Amount


%




 


 


 


 


 


 


 




Individual


4,167,732


47%


 


4,198,386


49%




Energy & Utilities


653,776


7%


 


719,854


9%




Real Estate


504,982


6%


 


453,415


5%




Hospitality & Leisure


497,727


6%


 


450,741


5%




Food Industry


475,871


5%


 


524,286


7%




Trade


436,193


5%


 


394,495


5%




Agriculture


371,703


4%


 


269,844


3%




Pawn Shops


280,235


3%


 


279,410


3%




Construction


256,503


3%


 


233,771


3%




Communication


218,039


2%


 


114,032


1%




Healthcare


183,630


2%


 


172,255


2%




Automotive


170,654


2%


 


160,795


2%




Metals and Mining


95,133


1%


 


84,419


1%




Services


94,962


1%


 


108,186


1%




Transportation


70,480


1%


 


96,427


1%




Financial Services


68,012


1%


 


87,501


1%




Other


350,315


4%


 


205,400


2%




 


 


 


 


 


 




 


 


 


 


 


 




Total loans and advances to customers (before impairment)


 8,895,947


100%


 


8,553,217


100%




 


 


 


 


 


 




 
As of 30 June 2018 the Group had 136 borrowers (31 December 2017: 142 borrowers) with aggregated gross loan amounts above GEL 5,000 thousand. The total aggregated amount of these loans was GEL 2,447,003 thousand (31 December 2017: GEL 2,437,750 thousand) or 27.4% of the gross loan portfolio (31 December 2017: 28.5%).
7        Loans and Advances to Customers (Continued)
Analysis by credit quality of loans outstanding as of 30 June 2018 is as follows:




In thousands of GEL


Corpo-rate


Consumer


Mortgage


MSME


Total




 


 


 


 


 


 






Stage 1


 


 


 


 


 




- Loans and advances to customers (before impairment)


 2,261,878


 1,651,278


1,951,245


 1,856,169


 7,720,570




- Less: Provision for loan impairment


 (23,390)


 (44,990)


 (1,428)


 (16,091)


 (85,899)




 


 


 


 


 


 




 


 


 


 


 


 




Total Stage 1 loans and advances to customers


 2,238,488


 1,606,288


 1,949,817


 1,840,078


 7,634,671




 


 


 


 


 


 




 


 


 


 


 


 




Stage 2


 


 


 


 


 




- Loans and advances to customers (before impairment)


 232,240


 289,209


 194,301


 200,434


 916,184




- Less: Provision for loan impairment


 (12,599)


 (62,295)


 (11,297)


 (25,235)


 (111,426)




 


 


 


 


 


 




 


 


 


 


 


 




Total Stage 2 loans and advances to customers


 219,641


 226,914


 183,004


 175,199


 804,758




 


 


 


 


 


 




 


 


 


 


 


 




Stage 3


 


 


 


 




- Loans and advances to customers (before impairment)


 87,494


 70,332


 40,084


 61,283


 259,193




- Less: Provision for loan impairment


 (35,482)


 (51,088)


 (13,402)


 (24,070)


 (124,042)




 


 


 


 


 


 




 


 


 


 


 


 




Total Stage 3 loans and advances to customers


 52,012


 19,244


 26,682


 37,213


 135,151




 


 


 


 


 


 




 


 


 


 


 


 




Total loans and advances to customers (before impairment)


2,581,612


2,010,819


2,185,630


2,117,886


8,895,947




 


 


 


 


 


 




Total provision for loan impairment


(71,471)


(158,373)


(26,127)


(65,396)


(321,367)




 


 


 


 


 


 




 


 


 


 


 


 




Total loans and advances to customers


2,510,141


1,852,446


2,159,503


2,052,490


8,574,580




 


 


 


 


 


 




 
 
7       Loans and Advances to Customers (Continued)
Analysis by credit quality of loans outstanding as of 31 December 2017 is as follows:
 




In thousands of GEL


Corpo-rate


Consumer


Mortgage


MSME


Total




 


 


 


 


 


 






Neither past due nor impaired


 


 


 


 


 




- Borrowers with credit history over two years


 1,679,029


 1,556,495


 1,679,495


 1,134,503


 6,049,522




- New borrowers


 708,038


 479,433


 338,456


 619,528


 2,145,455




 


 


 


 


 


 




 


 


 


 


 


 




Total neither past due nor impaired


2,387,067


    2,035,928


2,017,951


1,754,031


8,194,977




 


 


 


 


 


 




 


 


 


 


 


 




Past due but not impaired


 


 


 


 


 




- 1 to 30 days overdue


 -  


41,088


15,089


31,598


87,775




- 31 to 90 days overdue


 -  


 26,433


 10,620


 13,395


 50,448




- 91 to 180 days overdue


 23,029


 165


 -  


 -  


 23,194




- 181 to 360 days overdue


 -  


 116


 -  


 -  


 116




- More than 360 days overdue


 -  


 48


 -  


 -  


 48




 


 


 


 


 


 




 


 


 


 


 


 




Total past due but not impaired


23,029


67,850


25,709


44,993


161,581




 


 


 


 


 


 




 


 


 


 


 


 




Individually assessed impaired loans


 


 


 


 




- Not overdue


 39,443


 -  


 -  


 2,420


 41,863




- 1 to 30 days overdue


 10,351


 -  


 -  


 -  


 10,351




- 31 to 90 days overdue


 4,455


 -  


 -  


 -  


 4,455




- 91 to 180 days overdue


 48


 -  


 -  


 -  


 48




- 181 to 360 days overdue


 -  


 -  


 -  


 -  


 -  




- More than 360 days overdue


 8,740


 -  


 -  


 -  


 8,740




 


 


 


 -  


 


 




 


 


 


 


 


 




Total individually assessed impaired loans


63,037


 -  


 -  


 2,420


65,457




 


 


 


 


 


 




 


 


 


 


 


 




Collectively assessed impaired loans


 


 


 


 




- not overdue


 1,266


 6,669


5,912


6,744


 20,591




- 1 to 30 days overdue


 668


 2,605


 5,097


 2,897


 11,267




- 31 to 90 days overdue


 -  


 4,078


 5,595


 3,542


 13,215




- 91 to 180 days overdue


 -  


 28,609


 2,561


 10,009


41,179




- 181 to 360 days overdue


 -  


 10,246


 4,335


 8,969


23,550




- More than 360 days overdue


 325


 7,440


 2,568


 11,067


 21,400




 


 


 


 


 


 




 


 


 


 


 


 




Total collectively assessed impaired loans


2,259


59,647


26,068


43,228


131,202




 


 


 


 


 


 




 


 


 


 


 


 




 
Total loans and advances to customers (before impairment)


2,475,392


2,163,425


2,069,728


1,844,672


8,553,217




 


 


 


 


 


 




Total provision


(49,626)


(121,538)


(17,577)


(39,123)


(227,864)




 


 


 


 


 


 




 


 


 


 


 


 




Total loans and advances to customers


2,425,766


2,041,887


2,052,151


1,805,549


8,325,353




 


 


 


 


 


 




7       Loans and Advances to Customers (Continued)
In 2018 the Group applied the portfolio provisioning methodology prescribed by IFRS 9. For details please refer to Note 2. For the periods before 1 January 2018, the Group applied the portfolio provisioning methodology prescribed by IAS 39, Financial Instruments: Recognition and Measurement, and it created portfolio provisions for impairment losses that were incurred but have not been specifically identified with any individual loan by the end of reporting period.
The tables above provide an analysis of the loan portfolio based on credit quality. As at January 1, 2018 the group implemented provisioning methodology in accordance with IFRS 9. For details please refer to Note 2.
For the periods before 1 January 2018, the Group's policy for credit risk management purposes was to classify each loan as 'neither past due nor impaired', 'past due but not impaired', 'individually assessed impaired loans' and 'collectively assessed impaired loans'.  The pool of 'neither past due nor impaired loans' included exposures that were not overdue and were not classified as impaired. 'Past due but not impaired' loans included overdue performing loans but with no objective evidence of impairment identified. The classification included as well triggered loans that were not impaired because the current value of the expected cash and collateral recoveries were sufficient for full repayment. 'Individually assessed impaired loans' included exposures which were assessed for impairment on an individual basis, and an ad-hoc impairment allowance was created. 'Collectively assessed impaired loans' included exposures for which objective evidence of impairment was identified and the respective collective impairment allowance was created.
The Group conducts collective assessment of the borrowers on a monthly basis. As for the individual assessment, it is performed quarterly.
Individually assessed impaired loans' include exposures which are impaired and individual impairment is applied based on individual assessment. 'Collectively assessed impaired loans' include exposures for which default triggers were identified and the respective collective impairment allowance was created. Both individually and collectively impaired loans are classified as stage 3 exposures. The Group conducts collective assessment of the borrowers on a monthly basis. As for the individual assessment, it is performed quarterly.
The amount and type of collateral required depend on an assessment of the credit risk of the counterparty.  There are three key types of collateral:
 
·      Real estate;
·      Movable property including fixed assets, inventory and precious metals;
·     Financial assets including deposits, stocks, and third party guarantees.
The financial effect of collateral is presented by disclosing the collateral values separately for (i) those assets where collateral and other credit enhancements are equal to or exceed the assets' carrying value ("over-collateralised assets") and (ii) those assets where collateral and other credit enhancements are less than the assets' carrying value ("under-collateralised assets").
 
The effect of collateral as of 30 June 2018:
 




 


Over-collateralised assets
 


Under-collateralised assets




 
In thousands of GEL


Carrying value of the   assets


Value of collateral


Carrying value of the assets


Value of
 collateral




 


 


 


 


 




Corporate


 2,282,832


 5,338,874


 298,780


 72,889




Consumer


937,378


1,989,996


1,073,441


31,951




Mortgage


 2,147,330


 4,452,532


 38,300


 28,522




MSME


1,926,634


4,282,620


191,252


124,296




 


 


 


 


 




 


 


 


 


 




Total


 7,294,174


 16,064,022


 1,601,773


 257,658




 


 


 


 


 




 


 


 


 


 



 
 
 
 
 
 



 
7       Loans and Advances to Customers (Continued)
 
The effect of collateral as of 31 December 2017:
 




 


Over-collateralised assets


Under-collateralised assets




 
In thousands of GEL


Carrying value of the assets


Value of collateral


Carrying value of the assets


Value of
collateral




 


 


 


 


 




Corporate


2,129,927


 5,194,598


 345,465


 97,386




Consumer


908,387


2,132,566


1,255,038


25,781




Mortgage


2,042,001


 4,429,201


 27,727


 17,189




MSME


1,688,438


3,970,931


156,234


146,949




 


 


 


 


 




 


 


 


 


 




Total


 6,768,753


 15,727,296


 1,784,464


 287,305




 


 


 


 


 




 


 


 


 


 



 
 
 
 
 
 



The effect of collateral is determined by comparing the fair value of collateral to outstanding gross loans and advances in the reporting date.
At the central level a specific unit manages collateral to ensure that they serve as an adequate mitigation for credit risk management purposes. In line with the Group's internal policies, collateral provided to loans are evaluated by the Internal Appraisal Group (external reviewers are used in case of loans to related parties or specific cases when complex objects are appraised). The Internal Appraisal Group is part of the collateral management unit and, in order to ensure adequate and objective appraisal procedures, it is independent from the loan granting process. Real estate collateral of significant value is re-evaluated annually by internal appraisers. Statistical methods are used to monitor the value of real estate collateral that are of non-significant value and other types of collaterals such as movable assets and precious metals.
Collateral values include the contractual price of third-party guarantees, which, due to their nature, are capped at the loan's carrying value. The values of third-party guarantees in the tables above amounted to GEL 499,695 thousand and GEL 527,498 thousand as of 30 June 2018 and 31 December 2017, respectively. These third-party guarantees are not taken into consideration when assessing the impairment allowance. Refer to Note 26 for the estimated fair value of each class of loans and advances to customers. Interest rate analysis of loans and advances to customers is disclosed in Note 22. Information on related party balances is disclosed in Note 27.
8        Premises, Equipment and Intangible Assets




In thousands of GEL


Land, Premises and leasehold improvements


Office and Other

equipment*


Construction in

progress


Total premises and
equipment


Intangible Assets
 


Total




 


 


 


 


 


 


 




 


 


 


 


 


 


 




 


 


 


 


 


 


 




Carrying amount at 1 January 2017


186,950


73,918


53,164


314,032


60,957


374,989




 


 


 


 


 


 


 




 


 


 


 


 


 


 




Additions


2,718


11,403


6,664


20,785


10,823


31,608




Disposals


(1,133)


(2,210)


-  


(3,343)


-


(3,343)




Transfer


1,634


5


(1,639)


-


-


-




Effect of translation to presentation currency (cost)


(19)


(20)


-  


(39)


(8)


(47)




(Impairment charge)/reversal of impairment to profit or loss


(1,120)


(562)


(47)


(1,729)


(1,850)


(3,579)




Depreciation/amortisation charge


(2,705)


(9,407)


-  


(12,112)


(4,892)


(17,004)




Elimination of accumulated depreciation/amortisation on disposals


546


1,968


-  


2,514


-


2,514




Effect of translation to presentation currency (accumulated depreciation)


19


12


-  


31


4


35




 


 


 


 


 


 


 




 


 


 


 


 


 


 




Carrying amount at 30 June 2017


186,890


75,107


58,142


320,139


65,034


385,173




 


 


 


 


 


 


 




 


 


 


 


 


 


 




Cost or valuation at 30 June 2017


219,379


184,253


58,142


461,774


99,914


561,688




Accumulated depreciation/amortisation including accumulated impairment loss


(32,489)


(109,146)


-


(141,635)


(34,880)


(176,515)




 
 
 




Carrying amount at 1 January 2018


197,924


78,534


90,455


366,913


83,492


450,405




 


 


 


 


 


 


 




 


 


 


 


 


 


 




Additions


3,724


20,034


856


24,614


11,810


36,424




Disposals


(2,578)


(2,962)


-  


(5,540)


(75)


(5,615)




Transfer


1,596


-


(1,596)


-


-


-




Effect of translation to presentation currency (cost)


(36)


(55)


-  


(91)


(16)


(107)




(Impairment charge)/reversal of impairment to profit or loss


(164)


(14)


-


(178)


-


(178)




Depreciation/amortisation charge


(2,808)


(10,753)


-  


(13,561)


(7,338)


(20,899)




Elimination of accumulated depreciation/amortisation on disposals


1,201


958


-  


2,159


65


2,224




Effect of translation to presentation currency (accumulated depreciation)


35


63


-  


98


9


107




 


 


 


 


 


 


 




 


 


 


 


 


 


 




Carrying amount at 30 June 2018


198,894


85,805


89,715


374,414


87,947


462,361




 


 


 


 


 


 


 




 


 


 


 


 


 


 




Cost or valuation at 30 June 2018


235,659


208,758


89,715


534,132


135,553


669,685




Accumulated depreciation/amortisation including accumulated impairment loss


(36,765)


(122,953)


-


(159,718)


(47,606)


(207,324)




 


 


 


 


 


 


 




 
 
 
*Office and other equipment include furniture and fixtures, computer and office equipment, motor vehicles as well as other equipment.
 
 
Depreciation and amortisation charge presented on the face of the statement of profit or loss and other comprehensive income include depreciation and amortisation charge of premises and equipment, investment properties and intangible assets.
Construction in progress consists of construction and refurbishment of branch premises and the Bank's new headquarters. Upon completion, assets are to be transferred to premises.
 
 
9        Due to Credit Institutions




In thousands of GEL


 


30 June 2018


31 December 2017




 
Due to other banks


 


 


 




Correspondent accounts and overnight placements


 


35,003


21,777




Deposits from banks


 


172,602


64,441




Total due to other banks


 


207,605


86,218




 


 


 


 




Other borrowed funds


 


 


 




Borrowings from foreign banks and financial institutions


 


2,027,207


1,591,778




Borrowings from local banks and financial institutions


 


829,773


908,271




Borrowings from other financial institutions


 


31,152


31,533




Borrowings from Ministry of Finance


 


1,865


2,914




Total other borrowed funds


 


2,889,997


2,534,496




 


 


 


 




 


 


 


 




Total amounts due to credit institutions


 


3,097,602


2,620,714




 


 


 


 




 
10      Customer Accounts




In thousands of GEL


30 June 2018


31 December 2017




 


 


 




State and public organisations


 


 




- Current/settlement accounts


779,886


 810,783




- Term deposits


304,347


 209,641




 


 


 




Other legal entities


 


 




- Current/settlement accounts


2,176,735


 2,207,630




- Term deposits


203,979


 210,498




 


 


 




Individuals


 


 




- Current/demand accounts


2,058,505


 1,973,685




- Term deposits


2,409,133


 2,404,580




 


 


 




 


 


 




Total customer accounts


7,932,585


7,816,817




 


 


 




 
State and public organisations include government owned profit orientated businesses.
Economic sector concentrations within customer accounts are as follows:
 




In thousands of GEL


30 June 2018


31 December 2017




Amount


    %


 
Amount


 
%




 


 


 


 


 




Individual


4,467,638


57%


4,378,265


56%




Government Sector


502,105


7%


330,356


4%




Financial Services


420,056


5%


379,772


5%




Energy and Utilities


408,097


5%


429,722


5%




Construction


354,043


4%


377,944


5%




Transportation


348,166


4%


376,333


5%




Services


236,867


3%


236,128


3%




Hotels and Leisure


184,945


2%


174,777


2%




Trade


165,813


2%


209,339


3%




Real Estate


152,682


2%


119,507


2%




Healthcare


103,983


1%


106,439


1%




Food Industry


97,478


1%


175,676


2%




Automotive


78,256


1%


71,628


1%




Communication


60,701


1%


50,059


1%




Agriculture


46,886


1%


29,199


0%




Metals and Mining


14,992


0%


16,976


0%




Other


289,877


4%


354,697


5%




 


 


 


 


 




 


 


 


 


 




Total customer accounts


7,932,585


100%


7,816,817


100%




 


 


 


 


 




10      Customer Accounts (Continued)
As of 30 June 2018 the Group had 275 customers (31 December 2017: 261 customers) with balances above GEL 3,000 thousand. Their aggregate balance was GEL 3,500,494 thousand (2017: GEL 3,439,673 thousand) or 43.2% of total customer accounts (31 December 2017: 44.0%).
As of 30 June 2018 included in customer accounts are deposits of GEL 9,770 thousand and GEL 89,223 thousand (31 December 2017: GEL 11,040  thousand and GEL 120,406 thousand) held as collateral for irrevocable commitments under letters of credit and guarantees issued, respectively. Refer to Note 25. As of 30 June 2018, deposits held as collateral for loans to customers amounted to GEL 225,061 thousand (31 December 2017: GEL 224,899 thousand).
 
Refer to Note 26 for the disclosure of the fair value of customer accounts. Information on related party balances is disclosed in Note 27.
11      Provisions for Performance Guarantees, Credit Related Commitments and Liabilities and Charges
Movements in provisions for performance guarantees, credit related commitment and liabilities and charges are as follows:




In thousands of GEL


Perfor-mance guarantees


Credit related commitments


Other


Total




Carrying amount at 1 January 2017


2,635


8,049


5,342


16,026




 


 


 


 


 




Charges less releases recorded in profit or loss


(649)


(898)


(1,814)


(3,361)




Utilization of provision


-  


-  


(1,932)


(1,932)




 


 


 


 


 




 


 


 


 


 




Carrying amount at 30 June  2017


1,986


7,151


1,596


10,733




 


 


 


 


 




 


 


 


 


 




Carrying amount at 1 January 2018


2,067


8,239


2,894


13,200




 


 


 


 


 




 


 


 


 


 




IFRS 9 transition

effect


684


(4,661)


-


(3,977)




Charges less releases recorded in profit or loss


1,811


203


501


2,515




Effect of translation to presentation currency


(6)


-


-


(6)




Carrying amount as of 30 June 2018


4,556


3,781


3,395


11,732




 


 


 


 


 




Credit related commitments and performance guarantees: Impairment allowance estimation methods differ for (i) letter of credits and guarantees and (ii) undrawn credit lines.
For letter of credits and guarantees allowance estimation purposes the Bank applies the staged approach and classifies them in stage 1, stage 2 or stage 3. Significant stage 3 guarantees are assessed individually. Non-significant stage 3 as well as all stage 1 and stage 2 guarantees and letter of credits are assessed collectively using  exposure, marginal probability of conversion, loss given default and discount factor. Amount of the expected allowance differs based on the classification of the facility in the respective stage.
 
For impairment allowance assessment purposes for undrawn exposures the Bank distinguishes between revocable and irrevocable loan commitments. For revocable commitments the Bank does not create impairment allowance. As for the irrevocable undisbursed exposures the Bank estimates utilization parameter (which represents expected limit utilization percentage conditional on the default event) in order to convert off-balance part of the exposure to on-balance.
Once the respective on balance exposure is estimated, the Bank applies the same impairment framework approach as the one used for the respective type of on balance exposures.
Additions less releases recorded in profit or loss for "Other" provisions does not include gross change in total reserves for insurance claims in amount of GEL 15 thousand (30 June 2017: GEL 290 thousand) that are included in net claims incurred. Additions less releases recorded in profit or loss for provision for impairment of credit related commitments include provision for insurance receivables in the amount of GEL 486 thousand (30 June 2017: GEL 390 thousand) that are included in charges less releases recorded in profit or loss for "Other" provision.
12      Subordinated Debt
As of 30 June 2018, subordinated debt comprised of:
 




In thousands of GEL


Grant Date


Maturity Date


Currency


Outstanding amount in original currency


Outstanding amount in GEL




 


 


 


 


 


 




Deutsche Investitions und Entwicklungsgesellschaft MBH


19-Feb-08


15-Jul-18


USD


10,467


25,662




Deutsche Investitions und Entwicklungsgesellschaft MBH


26-Jun-13


15-Jun-20


USD


7,503


18,394




Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V.


19-Dec-13


15-Apr-23


USD


32,411


79,456




Kreditanstalt für Wiederaufbau Bankengruppe


10-Jun-14


8-May-21


GEL


6,399


6,399




Kreditanstalt für Wiederaufbau Bankengruppe


4-May-15


8-May-21


GEL


6,998


6,998




Green for Growth Fund


18-Dec-15


18-Dec-25


USD


15,302


37,515




European Fund for Southeast Europe


18-Dec-15


18-Dec-25


USD


7,662


18,784




European Fund for Southeast Europe


15-Mar-16


15-Mar-26


USD


7,661


18,781




Asian Developement Bank (ADB)


18-Oct-16


18-Oct-26


USD


50,570


123,977




Private lenders


30-Jun-17


30-Jun-23


USD


24,123


59,139




LC Opportunity fund(Thales)


14-Jul-17


5-Dec-18


USD


1,008


2,471




Total subordinated debt


 


 


 


 


397,576




 


 


 


 


 


 




 
 
As of 31 December 2017, subordinated debt comprised of:
 




In thousands of GEL


Grant Date


Maturity Date


Currency


Outstanding amount in original currency


Outstanding amount in GEL




 


 


 


 


 


 




Deutsche Investitions und Entwicklungsgesellschaft MBH


19-Feb-08


15-Jul-18


USD


 10,467


  27,134




Deutsche Investitions und Entwicklungsgesellschaft MBH


26-Jun-13


15-Jun-20


USD


 7,496


19,430




Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V.


19-Dec-13


15-Apr-23


USD


 35,577


  92,222




Kreditanstalt für Wiederaufbau Bankengruppe


10-Jun-14


8-May-21


GEL


 6,161


6,161




Kreditanstalt für Wiederaufbau Bankengruppe


4-May-15


8-May-21


GEL


 6,737


 6,737




Green for Growth Fund


18-Dec-15


18-Dec-25


USD


 15,259


  39,554




European Fund for Southeast Europe


18-Dec-15


18-Dec-25


USD


 7,640


19,805




European Fund for Southeast Europe


15-Mar-16


15-Mar-26


USD


 7,639


19,802




Asian Developement Bank (ADB)


18-Oct-16


18-Oct-26


USD


 50,467


130,822




Private lenders


30-Jun-17


30-Jun-23


USD


 24,114


62,508




LC Opportunity fund(Thales)


14-Jul-17


5-Dec-18


USD


 1,008


  2,613




 


 


 


 


 


 




Total subordinated debt


 


 


 


 


426,788




 


 


 


 


 


 




 
The debt ranks after all other creditors in case of liquidation.
 
Refer to Note 26 for the disclosure of the fair value of subordinated debt.
 
 
13      Share Capital




In thousands of GEL except for number of shares


Number of
ordinary shares


Share capital




 


 


 




As of 1 January 2017


52,166,703


1,581




 


 


 




Shares issued


516,140


16




Scrip dividend issued


146,903


5




Share exchange


102,121


3




 


 


 




 


 


 




As of 31 December 2017


52,931,867


1,605




 


 


 




 


 


 




Shares issued


618,640


21




Scrip dividend issued


58,762


2




Share exchange


635,060


22




 


 


 




 


 


 




As of 30 June 2018


54,244,329


1,650




 


 


 




As of 30 June 2018 the total authorised number of ordinary shares was 54,244,329 shares (31 December 2017: 52,931,867 shares). Each share has a nominal value of one British Penny. All issued ordinary shares are fully paid and entitled to dividends.
On 5 June 2017, at the Annual General Meeting, TBC Bank Group PLC's shareholders agreed on a dividend of GEL 1.42 per share, based on the 2016 audited financial statements. The dividend was recorded on 9 June 2017 and on 14 July 2017 shareholders received the payment of the total GEL 74,809 dividends. Scrip dividend shares amounted to 146,703 and were issued on 14th of July.
On 23 June 2017 102,121 new ordinary shares of TBC Bank Group PLC were admitted to the premium segment of the London Stock Exchange. The Offer Shares were issued pursuant to the terms of a private offer to the holders of the ordinary shares of JSC TBC Bank who have tendered Bank shares pursuant to the Offer. The holders of Bank shares are individuals that did not participate in the tender offer to holders made in 2016 by TBC Bank Group PLC prior to TBC Bank Group PLC's admission to the premium segment of the London Stock Exchange. Holders of Bank shares received one Offer Share for each Bank Share tendered pursuant to the Offer.
On 24 April 2018 635,060 new ordinary shares of TBC Bank Group PLC were admitted to the premium segment of the London Stock Exchange. The Offer Shares were issued pursuant to the terms of a private offer to the holders of the ordinary shares of JSC TBC Bank who have tendered Bank shares pursuant to the Offer. The holders of Bank shares are individuals that did not participate in the tender offer to holders made in 2016 or 2017 by TBC Bank Group PLC. Holders of Bank shares received one Offer Share for each Bank Share tendered pursuant to the Offer.
On 21 May 2018, at the Annual General Meeting, TBC Bank Group PLC's shareholders agreed on a dividend of GEL 1.64 per share, based on the 2017 audited financial statements. The dividend was recorded on 18 May 2018 and on 22 June 2018 shareholders received the payment of the total GEL 85,484 dividends. Scrip dividend shares amounted to 58,762 and were issued on 22th of June.
14      Share Based Payments
June 2013 arrangement:
In June 2013, the Bank's Supervisory Board approved a new management compensation scheme for the years 2013 - 2015 and authorised a maximum of 4,150 new shares to be issued in accordance with the scheme. The authorized number of new shares has increased to 1,037,500 in order to reflect the share split 250-for-1 approved by the shareholders on 4 March 2014.  According to the scheme, each year, (subject to predefined performance conditions) a certain number of shares will be awarded to the top management and some of the middle managers of the Group.
The performance evaluation is divided into (i) team goals and (ii) individual performance indicators. The total number of the shares to be awarded (legally transferred) depends on meeting the team goals and the book value per share according to the audited IFRS consolidated financial statements of the Group for the year preceding the award date. The team goals primarily focus on meeting the target for growth, profitability and portfolio quality metrics set by the Supervisory Board as well as compliance with certain regulatory requirements. The total number of shares in the bonus pool depends on achieving the team goals. Individual performance indicators are defined on an individual basis and are used to calculate the number of shares to be awarded to each employee out of the total bonus pool. Once awarded, these shares carry service conditions and, before those conditions are met, are eligible to dividends. However, they do not carry voting rights and cannot be sold or transferred to third parties.  Service conditions foresee continuous employment until the gradual transfer of the full title to the scheme participants is complete. Shares for each of the 2013, 2014 and 2015 tranche gradually ran over on the second, third, and fourth year following the performance appraisal. Eighty percent of the shares were vested in the fourth year after being awarded. Under this compensation system the total vesting period extends to June 2019.
Under the management compensation scheme, both shareholders and Supervisory Board held put options on the shares to be awarded. In addition, they both held put options on all bonus shares awarded under the previous share-based payment arrangements. All the put-options became null and void upon the listing on the LSE in June 2014. At no point of the operation of the share-based payment scheme did the management expect the put-options to be exercised. Consequently, the scheme was accounted for as equity-settled scheme and no obligation was recognized for the put-options.
In 2013 the Group considered 20 June as the grant date. Based on the management's expectation of performance and service conditions, 732,000 shares have been granted and will be gradually awarded to the members of the described scheme. An external evaluator assessed the fair value per share at the grant date at GEL 13.93 adjusted for the effect of 250-for-1 share split Income and market approaches were applied for the evaluation. The market approach involved an estimate of the market capitalization to book value of equity multiple and deal price to book value of equity multiple for comparable banks. When selecting comparable banks, the appraiser chose lenders operating in the Black Sea region and Central and Eastern Europe with a portfolio mix and growth priorities similar to TBC Bank. The income approach involved discounting free cash flows to equity estimated over a 10-year horizon. When developing the projections, the following major assumptions were made:
·      Over the 2013-2023 periods, the compound annual growth rate was assumed at 15.2% for loans and at 15.1% for customer accounts;
·      The spread on the Bank's customer business was assumed to gradually decline from an estimated 10.2% in 2013 to stabilize at 5.8% by 2021;
·      Over 2013-2023 period, non-interest income was forecast to average 1.8% of customer volume (i.e. gross loans and deposits);
·      Year-on-year growth in various components of employee's compensation was assumed at 37.6%-56.0% in 2014, 2.4%-9.8% in 2015 and was then assumed to gradually decline to 2.1%-3.6% in 2023. Year-on-year growth in administrative expenses was assumed at 38.3% in 2014, 10.4% in 2015 and to gradually decline to 3.3% in 2023;
·      The Bank's terminal value was estimated using the Gordon growth model, applying US long-term inflation forecast (2.1%) as the Bank's terminal cash flows growth rate;
·      Bank's cost of equity was estimated at 15.10%.
 
The final valuation was based on the income approach and the market one was used to check the results obtained by the former. The calculated value of Bank's equity was then divided by the number of ordinary shares issued as of date and further reduced with the discount for lack of control.
 
 
14   Share Based Payments (Continued)
June 2015 arrangement:
In June 2015, the Bank's Supervisory Board approved new management compensation scheme for the top and middle management and it accordingly authorised the issue of a maximum 3,115,890 new shares. The new system will be enforced from 2015 through 2018, replacing the system introduced in June 2013 -- the performance evaluation as well as the respective compensation for 2015 year-end results will be paid under the new system. According to the scheme, each year, subject to predefined performance conditions, a certain number of shares will be awarded to the Group's top managers and most of the middle ones. The performance features key performance indicators (KPIs) divided into (i) corporate and (ii) individual. The corporate KPIs are mainly related to achieving profitability, efficiency, and portfolio quality metrics set by the Board as well as non-financial indicators with regards to customers' experience and employees' engagement. The individual performance indicators are set on an individual basis and are used to calculate the number of shares to be awarded to each employee. According to the scheme, members of top management will also receive the fixed number of shares.  Once awarded, all shares carry service conditions and, before those conditions are met, are eligible to dividends; however they cannot be sold or transferred to third parties. 
Service conditions foresee continuous employment until the gradual transfer of the full title to the scheme participants is complete. Shares for each of the 2015, 2016, 2017 and 2018 tranche gradually ran over on the second, third and fourth year following the performance appraisal. Eighty percent of the shares were vested in the fourth year after being awarded. Under this compensation system the total vesting period extends to March 2022.
In 2015 the Group considered 17 June as the grant date. Based on the management's estimate of reached targets, as of 31 December 2015 1,908,960 shares were granted. The shares will be gradually awarded to the members as per the described scheme. At the grant date the fair value amounted to GEL 24.64 per share, as quoted on the London Stock Exchange.
Following the listing on the Premium segment of the London Stock Exchange, the share-based payment scheme remained conceptually the same and was only updated to reflect the Group's new structure, whereby TBC Bank Group PLC distributes its shares to the scheme's participants, instead of JSC TBC Bank. The respective shares' value is recharged to JSC TBC Bank. As a result, the accounting of the scheme did not change in the consolidated financial statements.
The Bank also pays personal income tax on behalf of equity settled scheme beneficiaries, which is accounted as cash settled part. Tabular information on both of the schemes is given below:
 




In GEL except for number of shares


30 June 2018


30 June 2017




 


 


 




Number of unvested shares at the beginning of the period


  2,284,773 


2,622,707




Change in estimate of number of shares expected to vest based on performance conditions


194,060


(13,100)




Number of shares vested


(330,021)


(324,834)




 


 


 




Number of unvested shares at the end of the period


2,148,812


  2,284,773 




 


 


 




Value at grant date per share according to June 2013 scheme (GEL)


13.93


13.93




Value at grant date per share according to June 2015 scheme (GEL)


                   
 24.64


                   
 24.64




 


 


 




 


 


 




Expense on equity-settled part (GEL thousand)


6,872


5,401




Expense on cash-settled part (GEL thousand)


6,734


2,578




 


 


 




 


 


 




Expense recognised as staff cost during the period (GEL thousand)


13,606


7,979




 


 


 




 
14   Share Based Payments (Continued)
Liability in respect of the cash-settled part of the award amounted to GEL 9,459 thousand as of 30 June 2018 (31 December 2017: GEL 12,675 thousand).
Staff costs related to equity settled part of the share based payment schemes are recognised in the income statement on a straight line basis over the vesting period of each relevant tranche and corresponding entry is credited to share based payment reserve in equity.
On 30 June 2018 based on level of achievement of key performance indicators the management has reassessed the number of shares that will have to be issued to the participants of the share based payment system and increased estimated number of shares to vest by 194,060 (30 June 2017: decreased by 13,100).
15      Earnings per Share
Basic earnings per share are calculated by dividing the profit or loss attributable to the owners of the Group by the weighted average number of ordinary shares in issue during the period.




 


In thousands of GEL except for number of shares


30 June 2018


30 June 2017




 


 


 


 




 


 
Profit for the period attributable to the owners of the Bank (excluding the profit attributable to the shares encumbered under the share based payment scheme


198,347


173,519




 


 


 


 




 


Weighted average number of ordinary shares in issue 


53,563,016


52,438,704




 


 


 


 




 


 


 


 




Basic earnings per ordinary share attributable to the owners of the Bank (expressed in GEL per share)


3.70


3.31




 


 


 


 



 
 
 
 



Diluted earnings per share are calculated by dividing the profit or loss attributable to owners of the Group by the weighted average number of ordinary shares adjusted for the effects of all dilutive potential ordinary shares during the period: 




In thousands of GEL except for number of shares


30 June 2018


30 June 2017




 


 


 




Profit for the period attributable to the owners of the Bank (excluding the profit attributable to the shares encumbered under the share based payment scheme -


198,347


173,519




 


 


 




 


 


 




Weighted average number of ordinary shares in issue adjusted for the effects of all dilutive potential ordinary shares during the period


54,056,392


53,169,508




 


 


 




 


 


 




Diluted earnings per ordinary share attributable to the owners of the Bank (expressed in GEL per share)


3.67


3.26




 


 


 




16      Segment Analysis
The Management Board (the "Board) is the chief operating decision maker and it reviews the Group's internal reporting in order to assess the performance and to allocate resources. In 2018 the Group has reassessed its definition of segments as disclosed in this note. Some of the clients were reallocated to different segments. Comparative information as of 30 June 2017 has not been updated due to impracticability.
The operating segments according to the new definition are now determined as follows:
·          Corporate - legal entity/group of affiliated entities with an annual revenue exceeding GEL 12.0 million or who have been granted facilities    with more than GEL 5 million. Some other business customers may also be assigned to the corporate segment or transferred to MSME on a discretionary basis;
·           Retail - non-business individual customers or individual business customers who have been granted mortgage loans; all individual customers are included in retail deposits;
·           MSME - Business customers who are not included in either corporate and retail segments; or legal entities who have been granted a Pawn shop loan; or individual customers of the newly-launched fully-digital bank, Space;
·              Corporate centre and other operations - comprises of the Treasury, other support and back office functions, and non-banking subsidiaries of the Group;
The operating segments during the year 2017 were as follows:
·           Corporate - all business customers with an annual revenue of GEL 8.0 million or more or who have been granted a loan in an amount equivalent to USD 1.5 million or more. Some other business customers may also be assigned to the Corporate segment on a discretionary basis;
·          Micro, small and medium enterprises  - all business customers who are not included in Corporate segment; Some other customers may also be assigned to the MSME segment on a discretionary basis;
·           Retail - all individual customers not included in the other categories;
·           Corporate Centre and Other Operations - comprises of the Treasury, other support and back office functions, and non-banking subsidiaries of the Group.
The Board of Directors assesses the performance of the operating segments based on a measure of adjusted profit before income tax.
The reportable segments are the same as the operating segments.
No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Group's total revenue in as of 30 June 2018 and 31 December 2017.
The vast majority of the entity's revenues are attributable to Georgia. A geographic analysis of origination of the Group's assets and liabilities is given in Note 23.
A summary of the Group's reportable segments as of 30 June 2018, 30 June 2017 and 31 December 2017 is provided below:

 

16      Segment Analysis (Continued)




In thousands of GEL


Corpo-rate


Retail


MSME


Corpo-rate centre and other operations


Total




 


 


 


 


 


 




30 June 2018


 


 


 


 


 




 


 


 


 


 


 




-  Interest income


117,838


 299,007


 112,534


68,622


 598,001




-  interest expense


 (63,859)


 (58,951)


 (4,917)


 (106,667)


 (234,394)




-  Inter-segment interest income/(expense)


 16,168


 (42,704)


 (37,998)


 64,534


 -  




 


 


 


 


 


 




 


 


 


 


 


 




-  Net interest income


70,147


 197,352


 69,619


26,489


 363,607




 


 


 


 


 


 




 


 


 


 


 


 




-  Fee and commission income


 18,399


 78,330


 10,621


 1,749


 109,099




-  Fee and commission expense


 (3,260)


 (28,407)


 (3,209)


 (141)


 (35,017)




 


 


 


 


 


 




 


 


 


 


 


 




-  Net Fee and commission income


 15,139


 49,923


 7,412


 1,608


 74,082




 


 


 


 


 


 




 


 


 


 


 


 




-  Net insurance premiums earned


-


-


-


10,602


10,602




-  Net insurance claims incurred and agents' commissions


-


-


-


(5,303)


(5,303)




-  Insurance Profit


 -  


 -  


 -  


 5,299


 5,299




-  Net gains from trading in foreign currencies


 19,816


 11,879


 10,030


 (2,943)


 38,782




-  Net losses from foreign exchange translation


 -  


 -  


 -  


 4,023


 4,023




-  Net losses from derivative financial instruments


 -  


 -  


 -  


 413


 413




-  Other operating income


 4,576


 4,679


 365


 643


 10,263




-  Share of profit of associates


 -  


 -  


 -  


 648


 648




 


 


 


 


 


 




 


 


 


 


 


 




-  Other operating non-interest income


 24,392


 16,558


 10,395


 8,083


 59,428




 


 


 


 


 


 




 


 


 


 


 


 




-  Provision for loan impairment


 (1,336)


 (54,872)


 (9,772)


-


 (65,980)




-  Provision for  performance guarantees and credit related commitments


 (1,879)


 (95)


 (40)


 (486)


 (2,500)




-  Provision for impairment of investments in finance lease


 -  


 -  


 -  


 (493)


 (493)




-  Provision for impairment of other financial assets


 (697)


 (3,843)


 (2)


 (927)


 (5,469)




-  Impairment of investment securities measured at fair value through other comprehensive income


 (31)


 -  


 -  


 (81)


 (112)




 


 


 


 


 


 




 


 


 


 


 


 




-  Profit before administrative and other expenses and income taxes


105,735


 205,023


 77,612


34,193


 422,563




 


 


 


 


 


 




 


 


 


 


 


 




-  Staff costs


 (13,370)


 (62,795)


 (19,530)


 (7,152)


 (102,847)




-  Depreciation and amortisation


 (1,038)


 (17,373)


 (2,342)


 (710)


 (21,463)




-  Provision for liabilities and charges


 -  


 -  


 -  


 -  


 -  




-  Administrative and other operating expenses


 (3,596)


 (39,431)


 (8,271)


 (7,414)


 (58,712)




 


 


 


 


 


 




 


 


 


 


 


 




-  Operating expenses


 (18,004)


 (119,599)


 (30,143)


 (15,276)


 (183,022)




 


 


 


 


 


 




-  Profit before tax


87,731


 85,424


 47,469


18,917


 239,541




-  Income tax expense


(13,304)


 (11,460)


 (7,308)


(7,506)


 (39,578)




-  Profit for the period


74,427


 73,964


 40,161


11,411 


 199,963




 


 


 


 


 


 




 


 


 


 


 


 




30 June 2018


 


 


 


 


 




Total gross loans and advances to customers reported


2,581,612


4,196,449


 2,117,886


-


 8,895,947




Total customer accounts reported


 2,559,449


4,467,638


 905,498


 -  


 7,932,585




Total credit related commitments and performance guarantees


 1,297,430


 231,464


 184,304


 -  


 1,713,198




 
 
 


 


 


 


 


 




16      Segment Analysis (Continued)




In thousands of GEL


Corpo-rate


Retail


MSME


Corpo-rate centre and other operations


Total




 


 


 


 


 


 




30 June 2017


 


 


 


 


 




 


 


 


 


 


 




-  Interest income


93,144


  256,428


89,182


  48,913


  487,667




-  interest expense


(45,509)


  (57,944)


  (4,960)


  (87,180)


(195,593)




-  Inter-segment interest income/(expense)


   7,985


(33,851)


  (24,923)


  50,789


 -




 


 


 


 


 


 




 


 


 


 


 


 




-  Net interest income


55,620


  164,633


  59,299


  12,522


  292,074




 


 


 


 


 


 




 


 


 


 


 


 




-  Fee and commission income


12,110


  67,482


  9,428


  699


  89,719




-  Fee and commission expense


   (3,243)


  (26,982)


  (3,841)


  (436)


  (34,502)




 


 


 


 


 


 




 


 


 


 


 


 




-  Net Fee and commission income


  8,867


  40,500


  5,587


  263


  55,217




 


 


 


 


 


 




 


 


 


 


 


 




-  Net insurance premiums earned


-


-


-


6,382


6,382




-  Net insurance claims incurred


-


-


-


(3,301)


(3,301)




-  Insurance Profit


-


-


-


3,081


3,081




-  Net gains from trading in foreign currencies


17,888


  10,065


  15,675


  (236)


  43,392




-  Net losses from foreign exchange translation


-


-


-


2,037


2,037




-  Net losses from derivative financial instruments


-


-


-


(38)


(38)




-  Other operating income


 4,045


 6,135


617


    3,437


14,234




-  Share of profit of associates


-


 -


-


577


577




 


 


 


 


 


 




 


 


 


 


 


 




-  Other operating non-interest income


   21,933


   16,200


 16,292


   5,777


  60,202




 


 


 


 


 


 




 


 


 


 


 


 




-  Provision for loan impairment


  22,129


  (55,288)


  (7,208)


 -  


  (40,367)




-  Provision for  performance guarantees and credit related commitments


887


108


552


-


1,547




-  Provision for impairment of investments in finance lease


-


-


-


(129)


(129)




-  Provision for impairment of other financial assets


(409)


14


(108)


(3,922)


(4,425)




-  Impairment of investment securities available for sale


-


-


-


-


-




 


 


 


 


 


 




 


 


 


 


 


 




-  Profit before administrative and other expenses and income taxes


 109,027


   166,167


 74,414


 17,592


  367,200




 


 


 


 


 


 




 


 


 


 


 


 




-  Staff costs


(12,840)


(63,933)


(16,106)


(9,497)


(102,376)




-  Depreciation and amortisation


(712)


(14,010)


(2,332)


(469)


(17,523)




-  Provision for liabilities and charges


-


-


-


2,495


2,495




-  Administrative and other operating expenses


(3,640)


(37,922)


(7,479)


(9,405)


(58,446)




 


 


 


 


 


 




 


 


 


 


 


 




-  Operating expenses


(17,192)


(115,865)


(25,917)


(16,876)


(175,850)




 


 


 


 


 


 




-  Profit before tax


   91,835


   50,302


 48,497


 716


  191,350




-  Income tax expense


  (13,909)


  (6,225)


  (6,681)


  11,880


  (14,935)




-  Profit for the period


 77,926


   44,077


 41,816


   12,596


  176,415




 


 


 


 


 


 




 


 


 


 


 


 




30 June 2017


 


 


 


 


 




Total gross loans and advances to customers reported


2,057,644


3,699,857


1,628,934


-


7,386,435




Total customer accounts reported


2,057,651


3,707,854


900,908


-


6,666,413




Total credit related commitments and performance guarantees


863,933


189,459


148,720


-


1,202,112




 
 
 


 


 


 


 


 




16      Segment Analysis (Continued)
Reportable segments' assets were reconciled to total assets as follows:




In thousands of GEL


30 June 2018


30 June 2017




 


 


 




Total segment assets (gross loans and advances to customers)


8,895,947


7,386,435




Provision for loan impairment


(321,367)


(212,130)




Cash and cash equivalents


1,605,163


1,219,108




Mandatory cash balances with National Bank of Georgia


1,034,177


931,654




Due from other banks


42,469


41,096




Investment securities available for sale


-


618,044




Investment securities measured at fair value through other comprehensive income


817,876


-




Bonds carried at amortized cost


477,694


389,036




Investments in subsidiaries and associates


1,925


1,021




Current income tax prepayment


7,369


7,719




Deferred income tax asset


2,331


3,407




Other financial assets


107,741


94,238




Investments in finance leases


172,027


96,329




Other assets


171,046


197,533




Premises and equipment


374,414


320,139




Intangible assets


87,947


65,034




Investment properties


78,094


93,502




Goodwill


28,657


28,657




 


 


 




 


 


 




Total assets per statement of financial position


13,583,510


11,280,822




 


 


 




 
Reportable segments' liabilities are reconciled to total liabilities as follows:




In thousands of GEL


30 June 2018


30 June 2017




 


 


 




Total segment liabilities (customer accounts)


7,932,585


6,666,413




Due to Credit institutions


3,097,602


2,313,550




Debt securities in issue


19,641


24,106




Current  income tax liability


26


272




Deferred income tax liability


22,980


2138




Provisions for liabilities and charges


11,732


10,733




Other financial liabilities


88,320


122,019




Other liabilities


69,364


61,013




Subordinated debt


397,576


390,070




 


 


 




 


 


 




Total liabilities per statement of financial position


11,639,826


9,590,314




 


 


 




 
 
 
 
17      Interest Income and Expense




In thousands of GEL


30 June 2018


30 June 2017




 


 


 




Interest income


 


 




Loans and advances to customers


 526,431


438,753




Investment securities available for sale


-


19,088




Investment securities measured at fair value through other comprehensive income


25,135


-




Bonds carried at amortised cost         


 17,879


15,250




Investments in leases


 16,610


9,667




Due from other banks


 11,946


4,909




 


 


 




 


 


 




Total interest income


598,001


487,667




 


 


 




 


 


 




Interest expense


 


 




 Customer accounts


127,727


 108,412




 Due to credit institutions


86,262


68,952




 Subordinated debt


19,599


 17,187




 Debt Securities in issue


806


 1,042




 


 


 




 


 


 




Total interest expense


234,394


195,593




 


 


 




 


 


 




Net interest income


363,607


292,074




 


 


 




 
During the six months ended 30 June 2018 the interest accrued on impaired loans amounted to GEL 13,887 thousand (30 June 2017: GEL 10,192 thousand).
18      Fee and Commission Income and Expense




In thousands of GEL


30 June 2018


30 June 2017




 


 


 




Fee and commission income


 


 




Fee and commission income in respect of financial instruments not at fair value through profit or loss:


 


 




- Card operations


47,010


40,245




- Settlement transactions


33,693


28,159




- Cash transactions


8,988


7,470




- Guarantees issued


9,079


6,073




- Issuance of letters of credit


2,360


3,459




- Foreign exchange operations


896


582




- Other


7,073


3,731




 


 


 




 


 


 




Total fee and commission income


109,099


89,719




 


 


 




 


 


 




Fee and commission expense


 


 




Fee and commission expense in respect of financial instruments not at fair value through profit or loss:


 


 




- Card operations


23,443


24,005




- Settlement transactions


4,285


3,385




- Cash transactions


2,359


2,105




- Letters of credit


588


465




- Guarantees received


620


561




- Foreign exchange operations


5


89




- Other


3,717


3,892




 


 


 




 


 


 




Total fee and commission expense


35,017


34,502




 


 


 




 


 


 




Net fee and commission income


74,082


55,217




 


 


 




19      Other Operating Income




In thousands of GEL


 


30 June 2018
 


30 June 2017
 




 


 


 


 




Revenues from operational leasing


 


3,142


3,510




Gain from sale of investment properties


 


1,896


1,174




Revenues from sale of cash-in terminals


 


1,253


597




Gain from sale of inventories of repossessed collateral


 


205


945




Gain on disposal of premises and equipment


 


199


191




Revenues from non-credit related fines


 


254


96




Reimbursed taxes


 


-


13




Other


 


3,314


7,708




 


 


 


 




 


 


 


 




Total other operating income


 


10,263


14,234




 


 


 


 




 
Revenue from operational leasing is wholly attributable to investment properties. The carrying value of the
inventories of repossessed collateral disposed of in the period ended 30 June 2018 was GEL 10,663 thousand (30 June 2017: GEL 10,284 thousand).
 
20      Administrative and Other Operating Expenses




In thousands of GEL


 


30 June 2018


30 June 2017




 


 


 


 




Rent


 


11,707


11,589




Advertising and marketing services


 


11,644


6,797




Intangible asset enhancement


 


5,066


4,781




Professional services


 


4,459


5,825




Taxes other than on income


 


3,603


2,812




Utility services


 


3,188


3,020




Stationery and other office expenses


 


2,507


2,240




Communications and supply


 


2,193


1,802




Premises and equipment maintenance


 


2,163


2,697




Security services


 


1,002


999




Business trip expenses


 


989


907




Insurance


 


968


1,976




Transportation and vehicle maintenance


 


792


798




Charity


 


561


417




Personnel training and recruitment


 


409


727




Loss on disposal of premises and equipment


 


336


171




Impairment of Premises & Equipment


 


178


1,729




Loss on disposal of inventories


 


100


1,186




Loss on disposal of investment properties


 


60


385




Impairment of intangible assets


 


-


1,850




Gross Change in IBNR


 


-


391




Write-down of current assets to fair value less costs to sell


 


(570)


(183)




Other


 


7,357


5,530




 


 


 


 




 


 


 


 




Total administrative and other operating expenses


 


58,712


58,446




 


 


 


 




21      Income Taxes
As at 30 June 2018, the statutory income tax rate applicable to the majority of the Group's income is 15% (six months ended 30 June 2017: 15%). On 12 June 2018 the new amendment to the current corporate taxation model came into force that postpones tax relief for re-invested profit from 1 January 2019 to 1 January 2023 for commercial banks, credit unions, insurance organizations, microfinance organizations and pawnshops.  The change resulted in re-measurement of deferred tax assets/liabilities  as at 30 June 2018 to the amounts that are estimated to be utilized in the period from 1 July 2018 to 31 December 2022. As a result of re-measurement, in order to reflect the change in the Georgian tax code, non-recurring income tax was recognized in amount of GEL 17.4 million as an expense in the income statement and GEL 5.1 million as a decrease to premises revaluation reserve in the statements of changes in equity. As of 31 December 2017, deferred tax assets/liabilities were measured to the amounts that were estimated to be utilized in the period from 1 January 2018 to 31 December 2018 in accordance with the tax model existing at that date.
22      Net Debt Reconciliation
The table below sets out an analysis of our debt and the movements in our debt for each of the periods presented. The debt items are those that are reported as financing in the statement of cash flows.




 


Liabilities from financing activities




In thousands of GEL


Other borrowed funds


Debt Securities in Issue


Subordinated debt
 


Total




 


 


 


 


 




Net debt at 1 January 2018


 2,534,496


 20,695


 426,788


 2,981,979




 


 


 


 


 




 


 


 


 


 




Cash flows


 340,409


(755)


(25,922)


 313,732




Foreign exchange adjustments


 (67,066)


(1,106)


(22,733)


 (90,905)




Other non-cash movements


 82,158


807


19,443


 102,408




 


 


 


 


 




 


 


 


 


 




Net debt at 30 June 2018


2,889,997


19,641


397,576


3,307,214




 


 


 


 


 




23      Financial and Other Risk Management
TBC Bank Group's strong risk governance reflects the importance placed by the Board and the Group's Risks, Ethics and Compliance Committee on shaping the risk strategy and managing credit, financial and non-financial risks. All components necessary for comprehensive risk governance are embedded into risk organization structure: enterprise risk management; credit, financial and non-financial risks management; risk reporting & supporting IT infrastructure; cross-risk analytical tools and techniques such as capital adequacy management and stress-testing. Comprehensive, transparent and prudent risk governance facilitates understanding and trust from multiple stakeholders, ensures sustainability and resiliency of the business model and positioning of risk management as Group's competitive advantage and strategic enabler.
The TBC Bank Group's governance structure ensures adequate oversight and accountabilities as well as clear segregation of duties. The Risks, Ethics and Compliance Committee is responsible for taking all the day-to-day decisions relating to the Group apart from those that are reserved for the Board. Namely, the committee carries out following duties: 1) Review and assessment of the Group's risk management strategy, risk appetite and tolerance, risk management system and risk policies; 2) Review and monitoring of the processes for compliance with laws, regulations and ethical codes of practice; 3) monitoring of the remediation of internal control deficiencies identified by internal and external auditors around compliance, ethics and risk management functions; 4) Annual self-assessment of the committee's performance and reporting of the results to the Board; 5) Review of the key risk management framework and other policy documents and make recommendations to the Board for their approval.
On the Bank level, risk management is the duty of the Supervisory Board, which has the overall responsibility to set the tone at the top and monitor compliance with established objectives. At the same time, Management Board governs and directs Groups' daily activities.
Both the Supervisory Board and the Management Board have established dedicated risk committees. Risk, Ethics and Compliance Committee of Supervisory Board approves Bank's Risk Appetite, supervises risk profile and risk governance practice within the Bank while Audit Committee is responsible for implementation of key accounting policies and facilitation of activities of internal and external auditors.
Management Board Risk Committee is established to guide group-wide risk management activities and monitor major risk trends to make sure risk profile complies with the established Risk Appetite of the Group. Operational Risk Committee makes decisions related to operational risk governance while Asset-Liability Management Committee ("ALCO") is responsible for implementation of ALM policies.
 
 
23     Financial and Other Risk Management (Continued)
The Management Board of the Group and, the Supervisory Board and Senior Management of the Bank govern risk objectives through Risk Appetite Statement ("RAS") which sets desired risk profile and respective risk limits for different economic environments. Risk Appetite ("RA") establishes monitoring and reporting responsibilities as well as escalation paths for different trigger events and limit breaches which as well prompt risk teams to establish and implement agreed mitigation actions. In order to effectively implement Risk Appetite in the Group's day-to-day operations, the RA metrics are cascaded into more granular business unit level limits. That way risk allocation is established across different segments and activities. The Board level oversight coupled with the permanent involvement of the Senior Management in TBC Group risk management ensures the clarity regarding risk objectives, intense monitoring of risk profile against risk appetite, prompt escalation of risk-related concerns and establishment of remediation actions.
The daily management of individual risks is based on the principle of the three lines of defense. While business lines are primary risk owners, risk teams assume the function of the second line defense. This role is performed through sanctioning transactions as well as tools and techniques for risk identification, analysis, measurement, monitoring and reporting. The committees are established at operational levels in charge of making transaction-level decisions that comprise of component of clear and sophisticated delegations of the authority framework based on "four-eye principle". All new products/projects go through the risk teams to assure risks are analyzed comprehensively. 
Such control arrangements guarantee that the Bank takes informed risk-taking decisions that are adequately priced, avoiding taking risks that are beyond the Group's established threshold. Within the Risk Organization the below teams manage the credit, liquidity, market, operational and other non-financial risks:
·      Enterprise Risk Management (ERM);
·      Credit Risk Management;
·      Underwriting (Credit sanctioning);
·      Restructuring and Collections;
·      Financial Risk Management;
·      Operational Risk Management.
The strong and independent structure enables fulfilment of all the required risk management functions within the second line of defense by highly skilled professionals with a balanced mix of credentials in banking and real sectors both on the local and international markets.
In addition to the above-mentioned risk teams, the Compliance Department (reporting directly to CEO) is specifically in charge of AML and compliance risk management. As the third line of defense, the Internal Audit Department provides an independent and objective assurance and recommendations to Group that facilitates further improvement of operations and risk management.
For the management of each significant risk, the Bank puts in place specific policies and procedures, governance tools and techniques, methodologies for risk identification, assessment and quantification. Sound risk reporting systems and IT infrastructure are important tools for efficient risk management of TBC Bank. Thus, significant emphasis and investments are made by the Bank to constantly drive the development of required solutions. Comprehensive reporting framework is in place for the Management Board of the Group and the Supervisory Board and the Senior Management of the Bank that enables intense oversight over risk developments and taking early remedial actions upon necessity.
Beyond the described risk governance components, compensation system features one of the most significant tools for introducing incentives for staff, aligned with the Bank's long term interests to generate sustainable risk-adjusted returns. The risk Key Performance Indicators ("KPIs") are incorporated into both the business line and the risk staff remunerations. The performance management framework differentiates risk staff incentives to safeguard the independence from business areas that they supervise and at the same time enable attraction and maintenance of qualified professionals. For that purpose, the Bank overweighs risk KPIs for risk and control staff and caps the share of variable remuneration.
 
 
23      Financial and Other Risk Management (Continued)
Credit risk. The Group is exposed to credit risk, which is the risk that a customer or counterparty will be unable to meet its obligation to settle outstanding amounts. The Group's exposure to credit risk arises as a result of its lending operations and other transactions with counterparties giving rise to financial assets. Maximum exposure to credit risk of on-balance sheet items equals their carrying values. For maximum exposure on off-balance sheet commitments refer to Note 25.
Credit risks include: risks arising from transactions with individual counterparties, concentration risk, currency-induced credit risks and residual risks.
-     Risks arising from transactions with individual counterparties are the loss risk related to default or non-fulfillment of contracts due to deterioration in the counterparty's credit quality;
-     Concentration risk is the risk related to the quality deterioration due to large exposures provided to single borrowers or a group of connected borrowers, or loan concentration in certain economic industries;
-     Currency-induced credit risks relate to risks arising from foreign currency-denominated loans in the Group's portfolio;
-     Residual risks result from applying credit risk-mitigation techniques, which could not satisfy expectation in relation to received collateral.
Comprehensive risk management methods and processes are established as part of the Group's risk management framework to manage credit risk effectively. The main principles for Group's credit risk management are: establish a prudent credit risk environment; operate under a sound credit-granting process; and maintain efficient processes for credit risk identification, measurement, control and monitoring. Respective policies and procedures establish a framework for lending decisions reflecting the Group's tolerance for credit risk. This framework includes detailed and formalised credit evaluation and collateral appraisal processes, administration and documentation, credit approval authorities at various levels, counterparty and industry concentration limits, and clearly defined roles and responsibilities of entities and staff involved in the origination, monitoring and management of credit.
Comprehensive risk management methods and processes are established as part of the Group's risk management framework to manage credit risk effectively. The main principles for Group's credit risk management are: establish a prudent credit risk environment; operate under a sound credit-granting process; and maintain efficient processes for credit risk identification, measurement, control and monitoring. Respective policies and procedures establish a framework for lending decisions reflecting the Group's tolerance for credit risk. This framework includes detailed and formalised credit evaluation and collateral appraisal processes, administration and documentation, credit approval authorities at various levels, counterparty and industry concentration limits, and clearly defined roles and responsibilities of entities and staff involved in the origination, monitoring and management of credit.
Credit Approval: The Group strives to ensure a sound credit-granting process by establishing well-defined credit granting criteria and building up an efficient process for the comprehensive assessment of a borrower's risk profile. The concept of three lines of defense is embedded in the credit risk assessment framework, with a clear segregation of duties among the parties involved in the credit assessment process.
The credit assessment process differs across segments, being further differentiated across various product types reflecting the different natures of these asset classes. Corporate, SME and larger retail and micro loans are assessed on an individual basis with thorough analysis of the borrower's creditworthiness and structure of the loan; whereas smaller retail and micro loans are mostly assessed in an automated way applying respective scoring models for the loan approval. Lending guidelines for business borrowers have been tailored to individual economic sectors, outlining key lending criteria and target ratios within each industry.
The Loan Approval Committees are responsible to review the credit applications and approve the credit products. Different Loan Approval Committees with clearly defined delegation authority are in place for the approval of credit exposures to Corporate, SME, Retail and Micro customers (except those products which are assessed applying scorecards).  The composition of a Loan Approval Committee depends on aggregated liabilities of the borrower and the borrower's risk profile. Credit risk managers (as members of respective Loan Approval Committees) ensure that the borrower and the proposed credit exposure risks are thoroughly analysed. 1. A loan to the Bank's top 20 borrowers or exceeding 5% of the Bank's regulatory capital requires the review and the approval of the Supervisory Board's Risk, Ethics and Compliance Committee. This committee also approves transactions with related parties resulting in exposures to individuals and legal entities exceeding GEL 150 and 200 thousand, respectively.
 
23      Financial and Other Risk Management (Continued)
Starting from May 2018 National Bank of Georgia initiated a new regulation setting limits for loans disbursed without through income verification. Limits are outlined as 25% and 15% of regulatory capital respectively for unsecured loans and loans secured by real estate. Currently the internal procedures for such loan disbursements are being changed and a service is being set up with the Revenue Service, which will enable the Bank to verify the income of the borrowers online. Together with the new regulation, the government is introducing initiatives to ensure continuous broad access to financing. These include simplification of the tax code to incentivize income registration rate.  Moreover, the Bank is in dialogue with the regulator to determine appropriate income verification techniques including analytical approaches.
Credit Risk Monitoring: The Group's risk management policies and processes are designed to identify and analyse risk in a timely manner, and monitor adherence to predefined limits by means of reliable and timely data. The Group dedicates considerable resources to gain a clear and accurate understanding of the credit risk faced across various business segments. The Group uses a robust monitoring system to react timely to macro and micro developments, identify weaknesses in the credit portfolio and outline solutions to make informed risk management decisions. Monitoring processes are tailored to the specifics of individual segments, as well as they encompass individual credit exposures, overall portfolio performance and external trends that may impact the portfolio's risk profile. Early warning signals serve as an important early alert system for the detection of credit deteriorations, leading to mitigating actions.
Complex monitoring system is in place for monitoring of individual counterparties with frequency of monitoring depending on the borrower's risk profile and exposure. Based on the results of the monitoring borrowers are classified across different risk categories. In case there are certain weaknesses present, which if materialized may lead to loan repayment problems, borrowers are classified as "watch" category. Although watch borrowers' financial standing is sufficient to repay obligations, these borrowers are closely monitored and specific actions are undertaken to mitigate potential weaknesses.  Watch category is used as one of the qualitative indicators for transferring of exposures to stage 2.
For retail and micro borrowers along with other portfolio level indicators, portfolio breakdown across risk categories is monitored on a regular basis. In case there are indicators that portfolio distribution across risk categories deteriorates above the redefined threshold it might trigger transferring the respective portfolio to stage 2, as long as deterioration signs are in place.
 
Reports relating to the credit quality of the credit portfolio are presented to the Board's Risk, Ethics and Compliance Committees on a quarterly basis. By comparing current data with historical figures and analysing forecasts, the management believes that it is capable identifying risks and responding to them by amending its policies in a timely manner.
Credit Risk Mitigation: Credit decisions are based primarily on the borrower's repayment capacity and creditworthiness; in addition, the Group uses credit risk mitigation tools such as collateral and guarantees to reduce the credit risk. The reliance that can be placed on these mitigants is carefully assessed for legal certainty and enforceability, market valuation of collateral and counterparty risk of the guarantor.
A centralised unit for collateral management governs the Group's view and strategy in relation to collateral management and ensures that collateral serves as an adequate mitigating factor for credit risk management purposes. The collateral management framework consists of a sound independent appraisal process, haircut system throughout the underwriting process, monitoring and revaluations.
Credit Risk Restructuring and Collection: A comprehensive portfolio supervision system is in place to identify weakened or problem credit exposures in a timely manner and to take prompt remedial actions. Dedicated restructuring units manage weakened borrowers across all business segments. The primary goal of the restructuring units is to rehabilitate the borrower and return to the performing category. The sophistication and complexity of rehabilitation process differs based on the type and size of exposure.
A centralised monitoring team monitors retail borrowers in delinquency, which coupled with branches' efforts, are aimed at maximizing collection. The specialised software is applied for early collection processes management. Specific strategies are tailored to different sub-groups of customers, reflecting respective risk levels, so that greater effort is dedicated to customers with a higher risk profile.
Dedicated recovery units manage loans with higher risk profile. Corporate and SME borrowers are transferred to a recovery unit in case of a strong probability that a material portion of the principal amount will not be paid and the main stream of recovery is no longer the borrower's cash flow. Retail and micro loans are generally transferred to the recovery unit or external collection agencies (in the case of unsecured loans) at 90 days overdue, although they may be transferred earlier if it is evident that the borrower is unable to repay the loan.
23      Financial and Other Risk Management (Continued)
Geographical risk concentrations. Assets, liabilities, credit related commitments and performance guarantees have generally been attributed to geographic regions based on the country in which the counterparty is located. Balances legally outstanding to/from off-shore companies which are closely related to Georgian counterparties are allocated to the caption "Georgia".  Cash on hand and premises and equipment have been allocated based on the country in which they are physically held.
 
The geographical concentration of the Group's assets and liabilities as of 30 June 2018 is set out below:
 




In thousands of GEL


Georgia


OECD


Non-OECD


Total




 


 


 


 


 




Assets


 


 


 


 




Cash and cash equivalents


840,491


762,962


1,710


1,605,163




Due from other banks


25,933


12,253


4,283


42,469




Mandatory cash balances with National Bank of Georgia


1,034,177


-


-


1,034,177




Loans and advances to customers


8,251,040


83,687


239,853


8,574,580




Investment securities measured at fair value through other comprehensive income


817,152


-


724


817,876




Bonds carried at amortised cost


477,694


-


-


477,694




Investments in leases


172,027


-


-


172,027




Other financial assets


107,436


66


239


107,741




 


 


 


 


 




 


 


 


 


 




Total financial assets


11,725,950


858,968


246,809


12,831,727




 


 


 


 


 




 


 


 


 


 




Non-financial assets


747,777


56


3,950


751,783




 


 


 


 


 




 


 


 


 


 




Total assets


12,473,727


859,024


250,759


13,583,510




 


 


 


 


 




 


 


 


 


 




Liabilities


 


 


 


 




Due to credit institutions


1,139,094


1,938,894


19,614


3,097,602




Customer accounts


6,704,840


561,773


665,972


7,932,585




Debt securities in issue


7,415


-


12,226


19,641




Other financial liabilities


88,007


293


20


88,320




Subordinated debt


59,140


213,370


125,066


397,576




 


 


 


 


 




 


 


 


 


 




Total financial liabilities


7,998,496


2,714,330


822,898


11,535,724




 


 


 


 


 




 


 


 


 


 




Non-financial liabilities


102,905


667


530


104,102




 


 


 


 


 




 


 


 


 


 




Total liabilities


8,101,401


2,714,997


823,428


11,639,826




 


 


 


 


 




 


 


 


 


 




Net balance sheet position


4,372,326


(1,855,973)


(572,669)


1,943,684




 


 


 


 


 




 


 


 


 


 




Performance guarantees


616,879


144,207


61,294


822,380




Credit related commitments


883,468


4,318


3,032


890,818




 


 


 


 


 



 
 
 
 
 
 



 
 
 
 
 
 
 
 
 
23      Financial and Other Risk Management (Continued)
The geographical concentration of the Group's assets and liabilities as of 31 December 2017 is set out below:
 




In thousands of GEL


Georgia


OECD


Non-OECD


Total




 


 


 


 


 




Assets


 


 


 


 




Cash and cash equivalents


820,647


608,728


2,102


1,431,477




Due from other banks


27,183


8,733


3,727


39,643




Mandatory cash balances with National Bank of Georgia


1,033,818


-


-


1,033,818




Loans and advances to customers


7,960,107


67,805


297,441


8,325,353




Investment securities available for sale


657,068


-


870


657,938




Bonds carried at amortised cost


449,538


-


-


449,538




Investments in leases


143,836


-


-


143,836




Other financial assets


145,798


141


205


146,144




 


 


 


 


 




 


 


 


 


 




Total financial assets


11,237,995


685,407


304,345


12,227,747




 


 


 


 


 




 


 


 


 


 




Non-financial assets


733,417


55


4,691


738,163




 


 


 


 


 




 


 


 


 


 




Total assets


11,971,412


685,462


309,036


12,965,910




 


 


 


 


 




 


 


 


 


 




Liabilities


 


 


 


 




Due to credit institutions


1,069,211


1,535,644


15,859


2,620,714




Customer accounts


6,499,134


694,821


622,862


7,816,817




Debt securities in issue


7,821


-


12,874


20,695




Other financial liabilities


90,649


474


630


91,753




Subordinated debt


62,508


232,263


132,017


426,788




 


 


 


 


 




 


 


 


 


 




Total financial liabilities


7,729,323


2,463,202


784,242


10,976,767




 


 


 


 


 




 


 


 


 


 




Non-financial liabilities


96,759


1,084


846


98,689




 


 


 


 


 




 


 


 


 


 




Total liabilities


7,826,082


2,464,286


785,088


11,075,456




 


 


 


 


 




 


 


 


 


 




Net balance sheet position


4,145,330


(1,778,824)


(476,052)


1,890,454




 


 


 


 


 




 


 


 


 


 




Performance guarantees


387,890


151,502


72,905


612,297




Credit related commitments


968,019


2,996


6,045


977,060




 


 


 


 


 



 
 
 
 
 
 



23      Financial and Other Risk Management (Continued)
Market risk. The Bank follows the Basel Committee's definition of market risk as the risk of losses in on- and off-balance sheet positions arising from movements in market prices. This risk is principally made up of (a) risks pertaining to interest rate instruments and equities in the trading book and (b) foreign exchange rate risk (or currency risk) and commodities risk throughout the Bank. The Bank's strategy is not to be involved in trading book activity or investments in commodities. Accordingly, the Bank's exposure to market risk is primarily limited to foreign exchange rate risk in the structural book.
Currency risk. Foreign exchange rate risk arises from the potential change in foreign currency exchange rates, which can affect the value of a financial instrument. This risk stems from the open currency positions created due to mismatches in foreign currency assets and liabilities. The NBG requires the Bank to monitor both balance-sheet and total aggregate (including off-balance sheet) open currency positions and to maintain the later one within 20% of the Bank's regulatory capital. As of 30 June 2018, the Bank maintained an aggregate open currency position of 0.8% of regulatory capital (2017: 1.5%). The Asset-Liability Management Committee ("ALCO") has set limits on the level of exposure by currency as well as on aggregate exposure positions which are more conservative than those set by the NBG. The Bank's compliance with such limits is monitored daily by the heads of the Treasury and Financial Risk Management Departments.
Currency risk management framework is governed through the Market Risk Management Policy, market risk management procedure and relevant methodologies.  In 2016 within the ICAAP framework the Bank developed methodology for allocating capital charges for FX risk following Basel guidelines. The table below summarises the Group's exposure to foreign currency exchange rate risk at the balance sheet date. While managing open currency position the Group considers all provisions to be denominated in the local currency. Gross amount of currency swap deposits is included in Derivatives. Therefore total financial assets and liabilities below are not traceable with either balance sheet or liquidity risk management tables, where net amount of gross currency swaps is presented:




 


As of 30 June 2018


 


As of 31 December 2017




In thousands of GEL


Monetary financial assets


Monetary financial liabilities


Deri-vatives


Net balance sheet position


 


Monetary financial assets


Monetary financial liabilities


Deri-vatives


Net balance sheet position




 


 


 


 


 


 


 


 


 


 




Georgian Lari


 5,187,463


 4,036,011


 115,405


1,266,857


 


4,814,429


3,767,858


164,521


1,211,092




US Dollars


 6,762,525


 6,633,126


  (115,282)


14,117


 


6,475,155


6,299,024


(153,449)


22,682




Euros


 755,061


 756,100


 1,430


 391


 


816,565


805,153


(9,315)


2,097




Other


 126,678


 110,467


 -  


 16,211


 


121,579


104,732


(899)


15,948




 


 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 


 




Total           


 12,831,727


 11,535,704


1,553


1,297,576


 


12,227,728


10,976,767


858


1,251,819




 


 


 


 


 


 


 


 


 


 



 
 
 
 
 
 
 
 
 
 
 
 
 



 
To assess the currency risk the Bank performs a value-at-risk ("VAR") sensitivity analysis on a quarterly basis. The analysis calculates the effect on the Group's income determined by possible worst movement of currency rates against the Georgian Lari, with all other variables held constant. To identify the maximum expected losses resulting from currency fluctuations, a 99% confidence level is defined based on the monthly variations in exchange rates over 3 year look-back period.  During the six months ended 30 June 2018 and the year ended 31 December 2017 the sensitivity analysis did not reveal any significant potential effect on the Group's equity:
 




 
In thousands of GEL


30 June 2018


31 December 2017


 




Maximum loss (VAR, 99% confidence level)


(2,193)


(2,206)


 




Maximum loss (VAR,95% confidence level)


(1,502)


(1,462)


 




 


 


 




 
Interest rate risk. Interest rate risk arises from potential changes in the market interest rates that can adversely affect the fair value or future cash flows of the financial instrument. This risk can arise from maturity mismatches of assets and liabilities, as well as from the re-pricing characteristics of such assets and liabilities.
 
23      Financial and Other Risk Management (Continued)
The Bank's deposits and the most loans are at fixed interest rates, while a portion of the Bank's borrowings is at a floating interest rate. The Bank's floating rate borrowings are, to a certain extent, hedged by the NBG paying a floating rate on the minimum reserves that the Bank holds with the NBG. The Bank has also entered into interest rate swap agreements in order to mitigate interest rate risk. Furthermore, many of the Bank's loans to customers contain a clause allowing it to adjust the interest rate on the loan in case of adverse interest rate movements, thereby limiting the Bank's exposure to interest rate risk. The management also believes that the Bank's interest rate margins provide a reasonable buffer to mitigate the effect of possible adverse interest rate movements. 
The table below summarises the Group's exposure to interest rate risks. It illustrates the aggregated amounts of the Group's financial assets and liabilities at the amounts monitored by the management and categorised by the earlier of contractual interest re-pricing or maturity dates. Currency and interest rate swaps are not netted when assessing the Group's exposure to interest rate risks. Therefore, total financial assets and liabilities below are not traceable with either balance sheet or other financial risk management tables. The tables consider both reserves placed with NBG and Interest bearing Nostro accounts. Income on NBG reserves and Nostros are calculated as benchmark minus margin whereby for benchmark Federal funds rate and ECB rates are considered in case of USD and EUR respectively. Therefore, they have impact on the TBC's Net interest income in case of both upward and downward shift of interest rates.
 




In thousands of GEL


Less than 1 month


From 1 to 6 months


From 6 to 12 months


More than 1 year


Total




 


 


 


 


 


 




30 June 2018


 


 


 


 


 




Total financial assets


4,146,318


 2,933,306


1,227,768


4,537,403


12,844,795




Total financial liabilities


4,011,422


 3,358,730


898,097


3,280,567


11,548,816




 


 


 


 


 


 




 


 


 


 


 


 




Net interest sensitivity gap as of 30 June 2018


134,896


(425,424)


329,671


1,256,836


1,295,979




 


 


 


 


 


 




 


 


 


 


 


 




31 December 2017


 


 


 


 


 




Total financial assets


 3,427,631


 2,449,029


 1,069,488


 5,302,335


12,248,483




Total financial liabilities


 4,094,978


 2,634,518


 1,038,842


 3,229,143


10,997,481




 


 


 


 


 


 




 


 


 


 


 


 




Net interest sensitivity gap as of 31 December 2017


 (667,347)


 (185,489)


 30,646


 2,073,192


 1,251,002




 


 


 


 


 


 




 
As of 30 June 2018, if interest rates had been 100 basis points lower with all other variables held constant, profit for the period would have been GEL 1,463 thousands higher (30 June 2017: GEL 6,417 thousand), mainly due to the increase in foreign currency funding which lowered duration of liabilities. Other comprehensive income would have been GEL 8,503 thousand higher (30 June 2017: GEL 4,935 thousand), as a result of an increase in the fair value of fixed rate financial assets measured at fair value through other comprehensive income and repurchase receivables.
If interest rates had been 100 basis points higher, with all other variables held constant, profit would have been GEL 1,463 thousands lower (30 June 2017: GEL 6,417 thousand), mainly due to the increase in foreign currency funding which lowered duration of liabilities. Other comprehensive income would have been GEL8,086 thousand lower (30 June 2017: GEL 4,760  thousand), as a result of decrease in the fair value of fixed rate financial assets measured at fair value through other comprehensive income.
With the assistance of independent international consulting firm from "big 4" the Bank has developed an advanced model to manage the interest rate risk on a standalone basis. The interest rate risk analysis is performed monthly by the Financial Risk Management Department.
23      Financial and Other Risk Management (Continued)
The Bank calculates the impact of changes in interest rates using both Net Interest Income and Economic Value sensitivity. Net Interest Income sensitivity measures the impact of a change of interest rates along the various maturities on the yield curve on the net interest revenue for the nearest year. Economic Value measures the impact of a change of interest rates along the various maturities on the yield curve on the present value of the Group's assets, liabilities and off-balance sheet instruments. When performing Net Interest Income and Economic Value sensitivity analysis, the Bank uses parallel shifts in interest rates as well as number of different scenarios. Under the ICAAP framework, TBC Bank reserves capital in the amount of the adverse effect of possible parallel yield curve shift scenarios on net interest income over a one-year period for Basel II Pillar 2 capital calculation purposes.
In order to manage Interest Rate risk the Bank establishes appropriate limits. The Bank monitors compliance with the limits and prepares forecasts. ALCO decides on actions that are necessary for effective interest rate risk management and follows up on the implementation. Periodic reporting is done to Management Board and the Board's Risk, Ethics and Compliance Committee.
 
Liquidity Risk. The liquidity risk is the risk that TBC Bank either does not have sufficient financial resources available to meet all of its obligations and commitments as they fall due, or can access those resources only at a high cost. The risk is managed by the Financial Risk Management and Treasury Departments and is monitored by the ALCO.
 
The principal objectives of the TBC Bank's liquidity risk management policy are to: (i) ensure the availability of funds in order to meet claims arising from total liabilities and off-balance sheet commitments, both actual and contingent, at an economic price; (ii) recognise any structural mismatch existing within TBC Bank's statement of financial position and set monitoring ratios to manage funding in line with well-balanced growth; and (iii) monitor liquidity and funding on an ongoing basis to ensure that approved business targets are met without compromising the risk profile of the Bank.
The liquidity risk is categorised into two risk types: the funding liquidity risk and the market liquidity risk.
Funding liquidity risk is the risk that TBC will not be able to efficiently meet both expected and unexpected current and future cash flow and collateral needs without affecting either its daily operations or its financial condition. To manage funding liquidity risk TBC Bank uses the Liquidity Coverage ratio and the Net Stable Funding ratio set forth under Basel III, as well as minimum liquidity ratio defined by the NBG. In addition the Bank performs stress tests, what if and scenarios analysis. In 2017, for liquidity risk management purposes National Bank of Georgia introduced Liquidity Coverage Ratio ("NBG LCR"), where in addition to Basel III guidelines conservative approaches were applied to Mandatory Reserves' weighting and to the deposits' withdrawal rates depending on the clients group's concentration. From 1st of September, 2017 the Bank also monitors compliance with NBG LCR limits.
The Liquidity Coverage ratio is used to help manage short-term liquidity risks. The Bank's liquidity risk management framework is designed to comprehensively project cash flows arising from assets, liabilities and off-balance sheet items over certain time bands and ensure that NBG LCR limits are met on a daily basis. TBC Bank also stress tests the results of liquidity through large shock scenarios set by the NBG.
 
The Net Stable Funding ratio is used for long-term liquidity risk management to promote resilience over a longer time horizon by creating additional incentives for TBC Bank to rely on more stable sources of funding on a continuous basis. The Bank also sets deposit concentration limits for large deposits and deposits of non-Georgian residents in its deposit portfolio.
 
Net Stable Funding ratio is calculated based on the IFRS consolidated financial statements. In addition, for internal purposes TBC Bank calculates NSFR ratio on the basis of standalone financial statements prepared in accordance with NBG's accounting rules.
The management believes that a strong and diversified funding structure is one of TBC Bank's differentiators. The Bank relies on relatively stable deposits from Georgia as the main source of funding. In order to maintain and further enhance the liability structure TBC Bank sets the targets for retail deposits in its strategy and sets the loan to deposit ratio limits.
The loan to deposit ratio (defined as total value of net loans divided by total value of deposits) stood at 108.1% and 106.5%, at the 30 June 2018 and 31 December 2017, respectively.
23      Financial and Other Risk Management (Continued)
Market liquidity risk is the risk that the Bank cannot easily offset or eliminate a position at the then-current market price because of inadequate market depth or market disruption. To manage it, TBC Bank follows Basel III guidelines on high-quality liquidity asset eligibility in order to ensure that the Bank's high-quality liquid assets can be sold without causing a significant movement in the price and with minimum loss of value. 
 
In addition, TBC Bank has a liquidity contingency plan, which is part of the Bank's overall prudential liquidity policy and is designed to ensure that TBC Bank is able to meet its funding and liquidity requirements and maintain its core business operations in deteriorating liquidity conditions that could arise outside the ordinary course of its business. 
The Bank calculates its liquidity ratio on a daily basis in accordance with the NBG's requirements.
The Liquidity Ratio: The limit is set by the NBG for average liquidity ratio, which is calculated as the ratio of average liquid assets to average liabilities for the respective month, including borrowings from financial institutions and part of off-balance sheet liabilities with residual maturity up to 6 months.
NBG LCR is calculated by reference to the qualified liquid assets divided by 30-day cash net outflows defined as per NBG guidelines. The limit is set by the NBG as per total LCR also by currency (GEL, FX). To promote larization in the country of Georgia, NBG defines lower limit for GEL LCR than that for FX LCR. In addition, NBG mandatory Regulatory reserves in FX currency is only considered at 75% per LCR calculation purposes. NBG guidelines apply higher withdrawal rates to the deposits and off-balance instruments depending on the clients group's concentration than those rates defined per Basel III requirements.
As of 30 June the ratios were well above the prudential limit set by the NBG as follows:




 


30 June 2018


31 December 2017


 




Average Liquidity Ratio


33.31%


32.50%


 




Total Liquidity Coverage Ratio


119.24%


112.72%


 




GEL Liquidity Coverage Ratio


104.98%


95.62%


 




FX Liquidity Coverage Ratio


128.97%


122.88%


 




 


 


 



 
 
 
 
 



 
According to daily cash flow forecasts and the surplus in liquidity standing, the Treasury Department places funds in short-term liquid assets , largely made up of short-term risk-free securities, interbank deposits and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole.
Maturity analysis. The table below summarizes the maturity analysis of the Group's financial liabilities, based on remaining undiscounted contractual obligations as of 30 June 2018 Subject-to-notice repayments are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment on the earliest date the Group could be required to pay and the table does not reflect the expected cash flows indicated by the Group's deposit retention history.
 
The maturity analysis of financial liabilities as of 30 June 2018 is as follows:
 




In thousands of GEL


Less than 3 months


From 3 to 12 months


From 12 months to 5 years


Over 5 years


Total




 


 


 


 


 


 




Liabilities


 


 


 


 


 




Due to Credit institutions


1,133,777


353,857


1,708,965


289,728


3,486,327




Customer accounts - individuals


2,705,515


1,327,022


506,062


24,841


4,563,440




Customer accounts - other


3,163,464


306,827


75,952


22,355


3,568,598




Other financial liabilities


75,122


13,136


62


-


88,320




Subordinated debt


30,680


44,912


241,198


268,066


584,856




Debt securities in issue


7,962


5,609


7,488


-


21,059




Gross settled forwards


110,585


21,460


-


-


132,045




Performance guarantees


113,253


323,754


369,963


15,410


822,380




Financial guarantees


16,943


50,195


27,768


-


94,906




Other credit related commitments


795,912


-


-


-


795,912




 


 


 


 


 


 




 


 


 


 


 


 




Total potential future payments for financial obligations


8,153,213


2,446,772


2,937,458


620,400


14,157,843




 


 


 


 


 


 





 

23      Financial and Other Risk Management (Continued)
The maturity analysis of financial liabilities as of 31 December 2017 is as follows:
 




In thousands of GEL


Less than 3 months


From 3 to 12 months


From 12 months to 5 years


Over 5 years


Total




 


 


 


 


 


 




Liabilities


 


 


 


 


 




Due to Credit institutions


1,142,865


418,613


1,167,970


151,417


2,880,865




Customer accounts - individuals


2,532,039


1,378,835


522,104


40,727


4,473,705




Customer accounts - other


3,068,027


192,852


133,236


80,976


3,475,091




Other financial liabilities


 82,685


 8,808


 260


-


91,753




Subordinated debt


5,060


74,191


198,042


346,703


623,996




Debt securities in issue


504


8,814


13,687


-


23,005




Gross settled forwards


176,822


5,509


-


-


182,331




Performance guarantees


55,914


241,460


306,788


8,135


612,297




Financial guarantees


52,256


122,014


74,457


155


248,882




Other credit related commitments


728,178


-


-


-


728,178




 


 


 


 


 


 




 


 


 


 


 


 




Total potential future payments for financial obligations


 7,844,350


 2,451,096


2,416,544


628,113


13,340,103




 


 


 


 


 


 




 
 
 
The undiscounted financial liability analysis gap does not reflect the historical stability of the current accounts. Their liquidation has historically taken place over a longer period than the one indicated in the tables above. These balances are included in amounts due in less than three months in the tables above.
 
Term Deposits included in the customer accounts are classified based on remaining contractual maturities, according to the Georgian Civil Code, however, individuals have the right to withdraw their deposits prior to maturity if they partially or fully forfeit their right to accrued interest and the Group is obliged to repay such deposits upon the depositor's demand. Based on the Bank's deposit retention history, the management does not expect that many customers will require repayment on the earliest possible date; accordingly, the table does not reflect the management's expectations as to actual cash outflows.
The Group does not use the above undiscounted maturity analysis to manage liquidity. Instead, the Group monitors the liquidity gap analysis based on the expected maturities. In particular, the customers' deposits are distributed in the given maturity gaps following their behavioural analysis.
 
23      Financial and Other Risk Management (Continued)
As of 30 June 2018 the analysis by expected maturities may be as follows:




In thousands of GEL


Less than 3 months


From 3 to 12 months


From 1 to 5 Years


Over 5 years


Total




 


 


 


 


 


 




Assets


 


 


 


 


 




Cash and cash equivalents


1,605,163


-


-


-


1,605,163




Due from other banks


22,181


12,293


7,995


-


42,469




Mandatory cash balances with National Bank of Georgia


1,034,177


-


-


-


1,034,177




Loans and advances to customers


1,168,798


1,743,857


3,473,132


2,188,793


8,574,580




Investment securities measured at fair value through other comprehensive income


817,768


-


-


108


817,876




Bonds carried at amortised cost


35,859


146,715


251,977


43,143


477,694




Investments in finance leases


26,785


46,462


97,002


1,778


172,027




Other financial assets


79,546


26,981


1,214


-


107,741




 


 


 


 


 


 




 


 


 


 


 


 




Total financial assets


4,790,277


1,976,308


3,831,320


2,233,822


12,831,727




 


 


 


 


 


 




 


 


 


 


 


 




Liabilities


 


 


 


 


 




Due to Credit institutions


1,112,853


260,275


1,457,086


267,388


3,097,602




Customer accounts


839,287


128,302


-


6,964,996


7,932,585




Debt securities in issue


7,589


4,915


7,137


-


19,641




Other financial liabilities


75,122


13,136


62


-


88,320




Subordinated debt


28,818


22,484


141,549


204,725


397,576




 


 


 


 


 


 




 


 


 


 


 


 




Total financial liabilities


2,063,669


429,112


1,605,834


7,437,109


11,535,724




 


 


 


 


 


 




 


 


 


 


 


 




Credit related commitments and performance guarantees


 


 


 


 


 




Performance guarantees


4,556


-


-


-


4,556




Financial guarantees


3,781


-


-


-


3,781




Other credit related commitments


132,932


-


-


-


132,932




 


 


 


 


 


 




Credit related commitments and performance guarantees


141,269


-


-


-


141,269




 


 


 


 


 


 




 


 


 


 


 


 




Net liquidity gap as of 30 June 2018


2,585,339


1,547,196


2,225,486


(5,203,287)


1,154,734




 


 


 


 


 


 




 


 


 


 


 


 




Cumulative gap as of 30 June 2018


2,585,339


4,132,535


6,358,021


1,154,734


 




 


 


 


 


 


 




 
 
 
23      Financial and Other Risk Management (Continued)
The management believes that the Group has sufficient liquidity to meet its current on- and off-balance sheet obligations. As of 31 December 2017 the analysis by expected maturities may be as follows:




In thousands of GEL


Less than 3 months


From 3 to 12 months


From 1 to 5 Years


Over 5 years


Total




 


 


 


 


 


 




Assets


 


 


 


 


 




Cash and cash equivalents


1,431,477


-


-


-


1,431,477




Due from other banks


32,845


3,071


3,727


-


39,643




Mandatory cash balances with National Bank of Georgia


1,033,818


-


-


-


1,033,818




Loans and advances to customers


1,031,608


1,767,797


3,438,180


2,087,768


8,325,353




Investment securities available for sale


657,938


-


-


-


657,938




Bonds carried at amortised cost


81,859


105,956


216,177


45,546


449,538




Investments in finance leases


22,896


38,526


82,414


-


143,836




Other financial assets


110,604


22,207


13,333


-


146,144




 


 


 


 


 


 




 


 


 


 


 


 




Total financial assets


4,403,045


1,937,557


3,753,831


2,133,314


12,227,747




 


 


 


 


 


 




 


 


 


 


 


 




Liabilities


 


 


 


 


 




Due to Credit institutions


1,137,076


351,381


990,480


141,777


2,620,714




Customer accounts


844,123


136,821


-


6,835,873


7,816,817




Debt securities in issue


47


7,778


12,870


-


20,695




Other financial liabilities


82,685


8,808


260


-


91,753




Subordinated debt


3,471


49,694


97,372


276,251


426,788




 


 


 


 


 


 




 


 


 


 


 


 




Total financial liabilities


2,067,402


554,482


1,100,982


7,253,901


10,976,767




 


 


 


 


 


 




 


 


 


 


 


 




Credit related commitments and performance guarantees


 


 


 


 


 




Performance guarantees


 2,067


-


-


-


 2,067




Financial guarantees


 8,239


-


-


-


 8,239




Other credit related commitments


105,268


-


-


-


105,268




 


 


 


 


 


 




Credit related commitments and performance guarantees


115,574


-


-


-


115,574




 


 


 


 


 


 




 


 


 


 


 


 




Net liquidity gap as of 31 December 2017


2,220,069


1,383,075


2,652,849


(5,120,587)


1,135,406




 


 


 


 


 


 




 


 


 


 


 


 




Cumulative gap as of 31 December 2017


2,220,069


3,603,144


6,255,993


1,135,406


 




 


 


 


 


 


 




 
 
The management believes that the Group has sufficient liquidity to meet its current on- and off-balance sheet obligations.
In order to assess the possible outflow of the bank's customer accounts management applied value-at-risk analysis. The statistical data was used on the basis of a holding period of one month for a look-back period of five years with a confidence level of 99%. The value at risk analysis was performed for the following maturity gaps: (0-1 months), (0-3 months), (0-6 months) and (0-12 months), based on which the maximum percentage of deposits' outflow was calculated.
Management believes that in spite of a substantial portion of customers' accounts being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Group would indicate that these customer accounts provide a long-term and stable source of funding for the Group. Moreover, the Group's liquidity risk management includes estimation of maturities for its current deposits. The estimate is based on statistical methods applied to historic information on the fluctuations of customer account balances.
 
23      Financial and Other Risk Management (Continued)
Operating environment. Most of the Group's business is based in Georgia. Over the last few years, the Georgian government has embarked in a number of civil, criminal, tax, administrative and commercial reforms that have positively affected the overall investment climate of the country. Today Georgia has an international reputation as a country with a favourable investment environment. Georgia continued to progress in the "Doing Business 2018" rankings by the World Bank (WB) and International Financial Corporation (IFC), becoming the 9th easiest country in the world to do business (out of 190), up by 7 steps compared to the previous year. The country improved its position in almost all categories, confirming itself as regional leader and outperforming most of the EU economies. Georgia also boasts low corruption levels, low tax burden and high transparency of its institutions according to the number of surveys by international institutions.
Economic growth continue to strengthen supported by strong growth in the region, improved sentiments domestically and attractive business climate. GDP growth averaged 5.3% in Q1 2018 and improved further to 5.7% during the first half of 2018, notably higher compared to the 5.0% growth in 2017. Economic growth in Q1 2018 was broad-based across almost all sectors of the economy.  Manufacturing (+5.6% YoY), trade and repairs (+5.1% YoY), hotels and restaurants (+10.9% YoY), construction (+8.7% YoY) and real estate (+13.4% YoY) represented major drivers of growth in Q1 2018, while almost all other sectors of the economy also posted growth rates.
Current Account deficit remained almost unchanged in Q1 2018, despite the improving growth. Increased imports of goods, driven mostly by higher imports of capital and intermediate goods as well as petroleum products was broadly balanced by increased exports of goods, higher tourism and remittance inflows. CA deficit to GDP ratio stood at 9.0% over the last four quarters in Q1 2018, 0.1 PP above the same ratio in 2017.  Exchange rate of GEL against major currencies remained broadly stable. As of the end of June, 2018 USD/GEL exchange rate of GEL depreciated by 1.8% YoY, while EUR/GEL exchange rate depreciated by 4.0% YoY. Real effective exchange rate appreciated slightly by 0.3% YoY in June 2018
After the above target inflation in 2017, mostly driven by one-off increase of prices, inflation aligned closer to the target in the first half of 2018. As of June 2018, CPI inflation stood at 2.2% and National Bank of Georgia maintained monetary policy rate unchanged at 7.25%.
Budget deficit over the last four quarters stood at 3.6% of GDP as of Q1 2018, 0.2 PP lower compared to the same figure of 2017. Consolidated budget revenues posted 7.6% growth in H1 2018. Over the same period infrastructure spending went up by 35.4% while current expenditures increased slightly by 0.4%.
Bank credit to private sector growth stood at 18.5% YoY, as of June 2018, excluding exchange rate effect. Credit growth was mostly driven by growth of loans in national currency (+28.8% YoY), while foreign currency loans went up by 10.9% (excl. FX effect) over the same period. From the segments perspective, loans to individuals increased by 22.2% YoY and loans to legal entities by 15.5% YoY, both at constant exchange rates.
 
24      Management of Capital
 
The Group's objectives in terms of capital management are to maintain appropriate levels of capital to support the business strategy, meet regulatory and stress testing-related requirements and safeguard the Group's ability to continue as a going concern. Additionally, the Group's capital management objectives entail ensuring that the Bank complies with the capital requirements set by the Basel Capital Accord 1988 capital adequacy ratios as stipulated by borrowing agreements. The compliance with capital adequacy ratios set by the NBG is monitored monthly with the reports outlining their calculation and are reviewed and signed by the Bank's CFO and Deputy CFO.
 
The Bank and the Group complied with all its internally and externally imposed capital requirements throughout the six months periods ended 30 June 2018 and the year 2017.
24      Management of Capital (Continued)
In December 2017, the NBG has introduced updated capital framework that is more compliant with Basel III guidelines. Under updated capital framework capital requirements are divided into Pillar 1 and Pillar 2 buffers. Details regarding the capital buffers are outlined below:
·      The capital conservation buffer (which was incorporated in minimum capital requirements) is separated and set at 2.5%;
·      A systemic risk buffer will be introduced for systematically important banks over the 4 years period;
·      A countercyclical capital buffer is currently set at 0%;
·      A currency induced credit risk (CICR) buffer replaced conservative weighting for un-hedged FX loans denominated in foreign currencies;
·      Concentration buffer for sectoral and single borrower exposure will be introduced;
·      The need for the net stress buffer will be assessed based on stress testing results provided by the Group;
·      A General Risk-assessment Programme (GRAPE) buffer defined by the regulator, is applied based on the Bank's specific risks.
In addition, based on the updated methodology, specific PTI (payment to income) and LTV (loan to value) thresholds were introduced. For the exposures which do not fall into pre-defined limits for PTI and LTV ratios, higher risk weights were applied.
 
 
NBG Basel II Capital adequacy ratio
 
Both Tier 1 and Total capital adequacy ratios are calculated based on the Basel III methodology introduced by NBG.
The table below presents the capital adequacy ratios as well as minimum requirements set by the NBG.




In thousands of GEL


 


30 June 2018


 


31 December 2017




 


 


 


 


 




Tier 1 Capital


 


1,498,857


 


1,437,218




Tier 2 Capital


 


409,541


 


448,069




Regulatory capital


 


1,908,398


 


1,885,287




 


 


 


 


 




Risk-weighted Exposures


 


 


 


 




Credit Risk Weighted Exposures


 


9,958,106


 


9,754,146




Risk Weighted Exposures for Market Risk


 


16,050


 


28,802




Risk Weighted Exposures for Operational Risk


 


1,226,198


 


970,241




Total Risk-weighted Exposures


 


11,200,354


 


10,753,189




 


 


 


 


 




Minimum Tier 1 ratio


 


10.2%


 


10.3%




Tier 1 Capital adequacy ratio


 


13.4%


 


13.4%




 


 


 


 


 




Minimum total capital adequacy ratio


 


15.6%


 


12.9%




Total Capital adequacy ratio


 


17.0%


 


17.5%




 
24      Management of Capital (Continued)
The breakdown of the Bank's assets into the carrying amounts based on NBG accounting rules and relevant risk-weighted exposures as of 30 June 2018 and 31 December 2017 are given in the tables below:




 


 


30 June 2018




In thousands of GEL


 


Carrying Value


 


RW amount




 


 


 


 


 




Cash, cash equivalents, Interbank Exposures and Securities


3,877,313


 


1,338,244




Gross loans and accrued interests,


 


8,025,886


 


6,377,449




Repossessed Assets


 


57,750


 


57,750




Fixed Assets and intangible assets


 


442,992


 


270,521




Other assets


 


1,029,756


 


1,288,074




 minus general provision, penalty and interest provision


 


(45,270)


 


(45,270)




Total


 


13,388,427


 


9,286,768




Total Off-balance


 


1,988,299


 


671,338




Market Risk


 


16,050


 


16,050




Operational Risk


 


653,972


 


    1,226,198




Total  Amount


 


16,046,748


 


11,200,354




 
 


 


31 December 2017




In thousands of GEL


 


Carrying Value


 


RW amount




 


 


 


 


 




Cash, cash equivalents, Interbank Exposures and Securities


3,510,760


 


1,275,017




Gross loans and accrued interests,


 


8,233,132


 


6,798,464




Repossessed Assets


 


58,530


 


58,530




Fixed Assets and intangible assets


 


437,878


 


264,768




Other assets


 


553,176


 


713,096




 minus general provision, penalty and interest provision


 


(30,862)


 


(30,862)




Total


 


12,762,614


 


9,079,013




Total Off-balance


 


1,919,565


 


 675,133




Market Risk


 


28,802


 


28,802




Operational Risk


 


517,462


 


970,241




Total  Amount


 


15,228,443


 


10,753,189




24      Management of Capital (Continued)
Capital adequacy ratio under Basel Capital Accord 1988
 
The Group and the Bank are also subject to minimum capital requirements established by covenants stated in loan agreements. These requirements include capital adequacy levels calculated in accordance with the requirements of the Basel Accord, as defined in the International Convergence of Capital Measurement and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market risks (updated November 2005), commonly known as Basel I. The composition of the Group's capital calculated in accordance with Basel Accord is as follows:
 




In thousands of GEL


30 June 2018


31 December 2017




 


 


 




Tier 1 capital


 


 




Share capital


542,204


524,807




Retained earnings and disclosed reserves


1,245,223


1,254,331




Less: Goodwill


(26,892)


(26,892)




Non-controlling interest


4,524


4,735




Total tier 1 capital


1,765,059


1,756,981




 


 


 




Tier 2 capital


 


 




Revaluation reserves


60,178


64,489




General Reserve


113,678


109,372




Subordinated debt (included in tier 2 capital)


300,208


355,944




Total tier 2 capital


474,064


529,805




 


 


 




 


 


 




Total capital


2,239,123


2,286,786




 


 


 




 


 


 




Credit risk weighted assets (including off-balance obligations)


9,094,281


8,749,752




Less: General Reserve


(207,689)


(118,492)




Market Risk


24,677


40,803




Total Risk-weighted assets


8,911,269


8,672,063




 


 


 




Minimum Tier 1 ratio


4.00%


4.0%




Tier 1 Capital adequacy ratio


19.81%


20.3%




 


 


 




Minimum total capital adequacy ratio


8.00%


8.0%




Total Capital adequacy ratio


25.13%


26.4%




 


 


 




 
Following the Basel I guidelines the General Reserve is defined by the management as the minimum among the following:
 
a) IFRS provisions created on loans without impairment trigger event
b) 2% of loans without impairment trigger event
c) 1.25% of total RWA (Risk Weighted Assets)
24      Management of Capital (Continued)
The breakdown of the Group's assets into the carrying amounts and relevant risk-weighted exposures as of 30 June 2018 and 31 December 2017 provided in the tables below:




In thousands of GEL


 


30 June 2018




Risk weighted Exposures


 


Carrying Value


 


RW amount




 


 


 


 


 




Cash and other cash equivalents, mandatory cash balances with the NBG, due from other banks, investment securities measured at fair value through other comprehensive income


 


3,967,207


 


269,680




Gross loans and accrued interests


 


8,895,947


 


7,172,434




Repossessed assets


 


123,137


 


123,137




Fixed assets and intangible assets


 


487,431


 


460,539




Other assets


 


391,749


 


391,749




Total


 


13,865,471


 


8,417,539




Total Off-balance


 


1,975,791


 


676,742




Less: Loan loss provision minus General Reserve


 


(207,689)


 


(207,689)




Market Risk


 


24,677


 


24,677




Total  Amount


 


15,658,250


 


8,911,269




 




In thousands of GEL


 


31 December 2017




Risk weighted Exposures


 


Carrying Value


 


RW amount




 


 


 


 


 




Cash and other cash equivalents, mandatory cash balances with the NBG, due from other banks, investment securities available for sale


 


3,609,132


 


214,353




Gross loans and accrued interests


 


 8,553,217


 


6,885,960




Repossessed assets


 


116,809


 


116,809




Fixed assets and intangible assets


 


476,027


 


449,136




Other assets


 


409,876


 


409,876




Total


 


13,165,061


 


8,076,134




Total Off-balance


 


1,907,457


 


673,618




Less: Loan loss provision minus General Reserve


 


(118,492)


 


(118,492)




Market Risk


 


40,803


 


40,803




Total  Amount


 


14,994,829


 


8,672,063




25      Contingencies and Commitments
Legal proceedings. When determining the level of provision to be set up with regards to such claims, or the amount (not subject to provisioning) to be disclosed in the financial statements, the management seeks both internal and external professional advice. The management believes that the provision recorded in these financial statements is adequate and the amount (not subject to provisioning) need not be disclosed as it will not have a material adverse effect on the financial condition or the results of future operations of the Group.
Tax legislation. Georgian and Azerbaijani tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. The management's interpretation of the legislation as applied to the Group's transactions and activity may be challenged by the relevant authorities. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the review period. To respond to the risks, the Group has engaged external tax specialists to carry out periodic reviews of Group's taxation policies and tax filings. The Group's management believes that its interpretation of the relevant legislation is appropriate and the Group's tax and customs positions will be sustained. Accordingly, as of 30 June 2018 and 31 December 2017 no provision for potential tax liabilities has been recorded. Details are disclosed in Note 21.
Operating lease commitments. Where the Group is the lessee, as of 30 June 2018, the future minimum lease payments under non-cancellable operating leases over the next year amounted to GEL 8,813 thousand (31 December 2017: 6,479 thousand).
Compliance with covenants. The Group is subject to certain covenants primarily related to its borrowings. Non-compliance with such covenants may result in negative consequences for the Group including growth in the cost of borrowings and declaration of default. The Group was in compliance with all covenants as of 31 December 2017 and as of 30 June 2018.
25      Contingencies and Commitments (Continued)
Credit related commitments and financial guarantees. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Financial guarantees and standby letters of credit, which represent the irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, that are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing.
Commitments to extend credit represent unused portions of authorisations to prolong credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to a loss in an amount equal to the total unused commitments. However, the likely amount of loss is lower than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term ones.
Performance guarantees. Performance guarantees are contracts that provide compensation in case of another party fails to perform a contractual obligation. Such contracts do not transfer credit risk. The risk under the performance guarantee contracts is the possibility that the insured event occurs (i.e.: the failure to perform the contractual obligation by another party). The key risks the Group faces are significant fluctuations in the frequency and severity of payments incurred on such contracts, relative to expectations.
Outstanding credit related commitments and performance guarantees are as follows:




In thousands of GEL


 


30 June 2018


31 December2017




 


 


 


 




Performance guarantees issued


 


822,380


612,297




Financial guarantees issued


 


 771


141,963




Undrawn credit lines


 


 795,912


728,178




Letters of credit issued


 


 94,135


106,919




Total credit related commitments and performance guarantees (before provision)


 


1,713,198


1,589,357




 


 


 


 




Provision for performance guarantees


 


(4,556)


(2,067)




Provision for credit related commitments and financial guarantees


 


(3,781)


(8,239)




 


 


 


 




 


 


 


 




Total credit related commitments and performance guarantees


 


1,704,861


1,579,051




 


 


 


 




The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded. Non-cancellable commitments as of 30 June 2018 included in undrawn credit lines above were GEL 492,696 thousand (31 December 2017: GEL 389,148 thousand).
Fair value of credit related commitments and financial guarantees were GEL 3,781 thousand as of 30 June 2018 (31 December 2017: GEL 8,239 thousand). Total credit related commitments and performance guarantees are denominated in currencies as follows:




In thousands of GEL


 


30 June 2018


31 December 2017




 


 


 


 




Georgian Lari


 


 652,607


618,544




US Dollars


 


 795,327


734,970




Euro


 


 219,626


166,304




Other


 


 45,638


69,539




 


 


 


 




 


 


 


 




Total


 


1,713,198


1,589,357




 


 


 


 




Capital expenditure commitments. As of 30 June 2018, the Group has contractual capital expenditure commitments amounting to GEL 12,565 thousand (31 December 2017: GEL 7,816 thousand).
26      Fair Value Disclosures
(a) Recurring fair value measurements
Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. The level in the fair value hierarchy into which the recurring fair value measurements are categorised as follows:




 



30 June 2018




31 December 2017





In thousands of GEL


Level 1


Level 2


Level 3


Total


Level 1


Level 2


Level 3


Total




Assets AT FAIR VALUE


 


 


 


 


 


 


 


 




FINANCIAL Assets


 


 


 


 


 


 


 


 




Investment securities measured at fair value through other comprehensive income


 


 


 


 


 


 


 


 




- Certificates of Deposits of National Bank of Georgia


-


91,944


-


91,944


-


7,728


-


7,728




- Corporate bonds


-


470,044


-


470,044


-


328,761


-


328,761




- Ministry of Finance Treasury Bills


-


255,160


-


255,160


-


319,745


-


319,745




Repurchase receivables
 


 


 


 


 


 


 


 


 




Foreign exchange forwards and gross settled currency swaps, included in other financial assets or due from banks


-


1,849


-


1,849


-


1,767


-


1,767




NON-FINANCIAL Assets


 


 


 


 


 


 


 


 




- Premises and leasehold improvements


-


-


284,591


284,591


-


-


283,905


283,905




 


 


 


 


 


 


 


 


 




Total ASSETS RECURRING FAIR VALUE MEASUREMENTS


-


818,997


284,591


1,103,588


-


658,001


283,905


941,906




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Liabilities Carried AT FAIR VALUE


 


 


 


 


 


 


 


 




FINANCIAL liabilities


 


 


 


 


 


 


 


 




- Interest rate swaps included in other financial liabilities


-


41


-


41


-


267


-


267




Foreign exchange forwards and gross settled currency swaps, included in other financial liabilities


-


296


-


296


-


909


-


909




 


 


 


 


 


 


 


 


 




Total Liabilities RECURRING FAIR VALUE MEASUREMENTS


-


337


-


337


-


1,176


-


1,176




 


 


 


 


 


 


 


 


 




There were no transfers between levels during the six months ended 30 June 2018 (2017: none).
26   Fair Value Disclosures (Continued)
(a) Recurring fair value measurements (continued)
The description of the valuation technique and the description of inputs used in the fair value measurement for level 2 measurements:
 




 


Fair value


 


 




In thousands of GEL


30 June 2018


31 December 2017


 


             Valuation technique


Inputs used




 


 


 


 


 


 




Assets AT FAIR VALUE


 


 


 


 


 




FINANCIAL Assets


 


 


 


 


 




Certificates of Deposits of NBG, Ministry of Finance Treasury Bills, Government notes, Corporate bonds


817,148


656,234


 


Discounted cash flows ("DCF")


Government bonds yield curve




Foreign exchange forwards and gross settled currency swaps, included in due from banks


1,849


1,767


 


Forward pricing using present value calculations


Official exchange rate, risk-free rate




 


 


 


 


 


 




 


 


 


 


 


 




Total ASSETS RECURRING FAIR VALUE MEASUREMENTS


818,997


658,001


 


 


 




 


 


 


 


 


 




 


 


 


 


 


 




LIABILITIES CARRIED AT FAIR VALUE


 


 


 


 


 




FINANCIAL LIABILITIES


 


 


 


 


 




Other financial liabilities


 


 


 


 


 




- Interest rate swaps included in other financial liabilities


41


267


 


Swap model using present value calculations


Observable yield curves




- Foreign exchange forwards included in other financial liabilities


296


909


 


Forward pricing using present value calculations


Official exchange rate, risk-free rate




 


 


 


 


 


 




 


 


 


 


 


 




Total RECURRING FAIR VALUE MEASUREMENTS  at level 2


337


1,176


 


 


 




 


 


 


 


 


 




 
There were no changes in the valuation technique for the level 2 and level 3 recurring fair value measurements during the six month period ended 30 June 2018 (2017: none). 
 
For details the techniques and inputs used for Level 3 recurring fair value measurement of (as well as reconciliation of movements in) premises refer to Note 8. The unobservable input to which the fair value estimate for premises is most sensitive is price per square meter: the higher the price per square meter,
the higher the fair value.
26   Fair Value Disclosures (Continued)
 (b) Assets and liabilities not measured at fair value but for which fair value is disclosed
 
Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are as follows:
 




 



30 June 2018




31 December 2017





In thousands of GEL


Level 1


Level 2


Level 3


Carrying Value


Level 1


Level 2


Level 3


Carrying Value




 


 


 


 


 


 


 


 


 




Financial Assets


 


 


 


 


 


 


 


 




Cash and cash equivalents


1,605,163


-  


-  


1,605,163


1,431,477


-


-


1,431,477




Due from other banks


-  


42,469


-


42,469


-


39,643


-


39,643




Mandatory cash balances with the NBG


-


1,034,177


-


1,034,177


-


1,033,818


-


1,033,818




Loans and advances to customers:


 


 


 


 


 


 


 


 




- Corporate loans


-


-


2,800,386


 2,510,141


-


-


                                                               3,292,352


2,425,766




- Consumer loans


-


-


2,019,577


 1,852,446


 


-


2,125,733


2,041,887




- Mortgage loans


-


-


2,070,475


 2,159,503


-


-


2,058,468


2,052,151




- MSME


-


-


2,095,799


 2,052,490


-


-


1,891,528


1,805,549




Bonds carried at amortised cost


-


484,721


-


477,694


-


458,950


-


449,538




Investments in leases


-


-


175,361


172,027


-


-


145,877


143,836




Other financial assets


-


-


105,892


105,892


-


-


144,377


144,377




NON-FINANCIAL Assets


 


 


 


 


-


-


 


 




Investment properties, at cost


-


-


80,059


78,094


-


-


85,012


79,232




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Total ASSETS


1,605,163


1,561,367


9,347,549


12,090,096


1,431,477


1,532,411


9,743,347 


11,647,274




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




FINANCIAL liabilities


 


 


 


 


 


 


 


 




Due to credit institutions


-


3,094,104


-


3,097,602


-


2,626,155


-


2,620,714




Customer accounts


-


5,015,126


2,904,582


7,932,585


-


4,992,099


2,937,349


7,816,817




Debt securities in issue


-


19,641


-


19,641


-


20,695


-


20,695




Other financial liabilities


-


 87,983


 -  


 87,983


-


 90,577


 -  


 90,577




Subordinated debt


-


396,939


-


397,576


-


425,809


-


426,788




 


 


 


 


 


 


 


 


 




 


 


 


 


 


 


 


 


 




Total Liabilities


-


8,613,793


2,904,582


11,535,387


-


8,155,335


 2,937,349


10,975,591




 


 


 


 


 


 


 


 


 




 
The fair values of financial assets and liabilities in the level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows valuation technique. The fair value of unquoted fixed interest rate instruments was calculated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of investment properties was estimated using market comparatives.
Amounts due to credit institutions were discounted at the Group's own incremental borrowing rate. Liabilities due on demand were discounted from the first date that the Group could be required to pay the amount.
There were no changes in the valuation technique for the level 2 and level 3 measurements of assets and liabilities not measured at fair values in the six months ended 30 June 2018 (2017: none).
 
27      Related Party Transactions
Pursuant to IAS 24 "Related Party Disclosures", parties are generally considered to be related if the parties are under common control or one party has the ability to control the other or it can exercise significant influence over the other party in taking financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Parties with more than 10% of ownership stake in the TBCG or with representatives in the Board of Directors are considered as Significant Shareholders. The key management personnel include members of TBCG's Board of Directors, the Management Board of the Bank and their close family members.
Transactions between TBC Bank Group PLC and its subsidiaries also meet the definition of related party transactions. Where these are eliminated on consolidation, they are not disclosed in the Group Financial Statements.
As of 30 June 2018, the outstanding balances with related parties were as follows:
 




In thousands of GEL


 


Significant shareholders


Key management personnel






 


 


 


 




Gross amount of loans and advances to customers (contractual interest rate: 6.6 - 36%)


 


136


7,774




Impairment provisions for loans and advances to customers


 


0


1




Customer accounts (contractual interest rate: 0 - 10.75 %)


 


46,482


24,689




Guarantees


 


9,367


336




Provision on guarantees


 


40


2




 


 


 


 




 
The income and expense items with related parties except from key management compensation during 30 June 2018 were as follows:
 




In thousands of GEL


 


Significant shareholders


Key management personnel






 


 


 


 




Interest income


 


9


248




Interest expense


 


222


111




Gains less losses from trading in foreign currencies


 


74


35




Foreign exchange translation gains less losses


 


4


(343)




Fee and commission income


 


38


27




Fee and commission expense


 


304


-




Administrative and other operating expenses (excluding staff costs)


 


51


198




 


 


 


 




 
The aggregate loan amounts advanced to, and repaid, by related parties during 30 June 2018 were as follows:
 




In thousands of GEL


Significant shareholders


Key management personnel




 


 


 




Amounts advanced to related parties during the period


275


3,160




Amounts repaid by related parties during the period


(305)


(2,404)




 


 


 




 
 
As of 31 December 2017, the outstanding balances with related parties were as follows:
 




In thousands of GEL


 


Significant shareholders


Key management personnel






 


 


 


 




Gross amount of loans and advances to customers (contractual interest rate: 0.4 - 36%)


 


154


 7,112




Impairment provisions for loans and advances to customers


 


-


 11




Customer accounts (contractual interest rate: 0 - 11.8 %)


 


 40,100


 11,190




Guarantees


 


 9,901


 512




Provision on guarantees


 


 30


 2




 


 


 


 




 
 
27   Related Party Transactions (Continued)
The income and expense items with related parties except from key management compensation during 30 June 2017 were as follows:
 




In thousands of GEL


 


Significant shareholders


Key management personnel






 


 


 


 




Interest income


 


9


199




Interest expense


 


128


228




Gains less losses from trading in foreign currencies


 


91


18




Foreign exchange translation gains less losses


 


(48)


(459)




Fee and commission income


 


75


44




Fee and commission expense


 


-


-




Administrative and other operating expenses (excluding staff costs)


 


47


171




Net loss on derivative financial instruments


 


38


-




 


 


 


 




 
Aggregate amounts of loans advanced to and repaid by related parties during the six months ended 30 June 2017 were as follows:
 




In thousands of GEL


Significant shareholders


Key management personnel




 


 


 




Amounts advanced to related parties during the period


232


970




Amounts repaid by related parties during the period


(899)


(1,647)




 


 


 




 
 
The compensation of the TBCG Board of Directors and the Bank's Management Board is presented below:
 




 


Expense over the six months ended


Accrued liability as of




In thousands of GEL


30 June 2018


30 June 2017


30 June 2018


31 December 2017




 


 


 


 


 




Salaries and bonuses


6,426


6,709


74


-




Cash settled bonuses related to share-based compensation


5,253


1,953


7,219


9,772




Equity-settled share-based compensation


5,537


4,338


-


-




 


 


 


 


 




 


 


 


 


 




Total


21,807


13,000


7,293


9,772




 


 


 


 


-




 
Included in salaries and bonuses for six months ended 30 June 2018 GEL 1,387 thousand relates to compensation for directors of TBCG paid by TBC Bank Group PLC (six months ended 30 June 2017: GEL 937 thousand).
 
 
 
 
28      Events after the reporting period
In July 2018, JSC TBC Bank has signed a conditional, non-binding strategic partnership agreement with Nikoil Open Join-Stock Company Investment Commercial Bank ("Nikoil Bank") to develop its business in Azerbaijan. The partnership includes several steps as follows:
 
1.   The merger of TBC Bank's Azerbaijani subsidiary, TBC Kredit, with Nikoil Bank, which remains subject to the approval of all relevant authorities, TBC Bank's financial due diligence (which will be undertaken by an internationally renowned audit firm), as well as the fulfillment of certain conditions. After the merger, TBC Bank would own up to 10% of the merged entity;
2.   Subject to the completion of the merger, TBC Bank would contribute to the development and execution of the merged entity's strategy. TBC Bank would be represented on the board of Nikoil Bank and, together with Nikoil management, would play a crucial role in the future development of the company. TBC Bank intends to use its Georgian banking sector expertise, including its newly-launched fully-digital bank, Space, to support Nikoil Bank's local growth in its targeted retail and MSME customer markets;
3.   TBC Bank would also receive a three year call option to acquire additional shares of the merged entity to reach a 50% +1 share interest, subject to the approval of all relevant authorities, which could be exercised at TBC Bank's sole discretion during the three year period.
 
[1] A full list of related undertakings and the country of incorporation is set out below.
 




Company Name


Country of incorporation

 


 



 


 

 



JSC TBC Bank


7 Marjanishvili Street, 0102, Tbilisi, Georgia

 



United Financial Corporation JSC


154 Agmashenebeli Avenue, 0112, Tbilisi, Georgia

 



TBC Capital LLC


11 Chavchavadze Avenue, 0179, Tbilisi, Georgia

 



TBC Leasing JSC


8 Bulachauri Street, 0160, Tbilisi, Georgia

 



TBC Kredit LLC


71-77, 28 May Street, AZ1010, Baku, Azerbaijan

 



Banking System Service Company LLC


7 Marjanishvili Street, 0102, Tbilisi, Georgia

 



TBC Pay LLC


7 Marjanishvili Street, 0102, Tbilisi, Georgia

 



Real Estate Management Fund JSC


7 Marjanishvili Street, 0102, Tbilisi, Georgia

 



TBC Invest LLC


7 Jabonitsky street, , 52520, Tel Aviv, Israel

 



Index LLC


23 Chkheidze Street, 0102, Tbilisi, Georgia

 



JSC TBC Insurance


24B, Al. Kazbegi Avenue, 0160, Tbilisi, Georgia

 



TBC Capital B.V


202 Oudegracht, 1811, CR Alkmaar Netherlands

 



TBC Invest International Ltd


7 Marjanishvili Street, 0102, Tbilisi, Georgia

 



University Development Fund


1 Chavchavadze Avenue, 0128 , Tbilisi, Georgia

 



Ltd Georgian Mill Company


2 Abashidze street, 0179, Tbilisi Georgia
 

 



JSC CreditInfo Georgia


2 Tarkhnishvili street, 0179, Tbilisi, Georgia

 



LTD Online Tickets


3 Irakli Abashidze street, 0179, Tbilisi, Georgia

 



 


 

 



 
 

 


[1]Excluding one-off items. Detailed information and effects are given in annex 20 on pages  47-48.
 


[2] 30 June 2017 ratios are calculated per IAS 39


[3] Market share figures are based on data from the National Bank of Georgia (NBG). The NBG includes interbank loans for calculating market share in loans


[4] The difference between the underlying and reported net profit figures in the second quarter 2018 was caused by the reversal of a deferred tax gain that was originally recognised in 2016, due to a recent amendment to the Georgian Tax Code in relation to corporate income tax. The reversal had a GEL 17.4 million negative effect on profit and loss and a GEL 5.1 million negative effect on equity. Reported consolidated net profit totalled 102.4 million.


[5] Number of transactions conducted in remote channels divided by total number of transactions


[6] Number of active mobile banking users divided by total number of active retail clients


[7] Excludes exchange rate effect


[8] Gross insurance profit can be reconciled to the standalone net insurance profit (as shown in annex 19 on page 46) as follows: gross insurance profit  less provisions, administrative expenses and taxes, plus fee and commission income and net interest income


[9] Gross insurance profit can be reconciled to the standalone net insurance profit as follows (as shown in annex 19 on page 46): gross insurance profit  less provisions, administrative expenses and taxes, plus  fee and commission income net interest income


[10] More information is given to note 21 to the Condensed Consolidated Interim Financial Statements


[11] TBC Bank Group PLC became the parent company of JSC TBC Bank on 10 August 2016.


[12] Cross-sell ratio is defined as the number of active products divided by the number of active customers.


[13] Source: Insurance State Supervision Service of Georgia


[14] Net earned premium equals earned premium minus reinsurer's share of earned premium


[15] On 1 January 2018 the Group adopted IFRS 9 which replaced IAS 39. Upon adoption of IFRS 9 the balance the available for sale reserve was replaced by the fair value reserve in accordance with the new requirements.


[16] For the stage 3 exposures MPD parameter equals to 100%.





This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
END
 
 
IR LIFFETFIIFIT